Subject: Net income, net operating losses, and loss limitations including passive activity and at risk limitations
FFA EA Book Reference: CH 13 Corporations
Ace Corporation had $700,000 of gross income from business operations and $725,000 of allowable business expenses. It also received $50,000 in dividends from a domestic corporation for which it can take an 80% deduction, ordinarily limited to 80% of its taxable income before the dividends received deduction. What is Ace Corporation's Net Operating Loss?
A corporation figures a net operating loss in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than gross income, the corporation has an NOL.
Correct Answer: A
Why is the answer not B? The question states the dividend received deduction is limited to 80% of taxable income which would limit it to $20,000 ($700000 Gross + $50000 dividends less $725000 expenses) which would result in ordinary income of $5000 ($700000 Gross + $50000 dividends lsess $725000 expenses less $20000 dividends received deduction).
DRD is $40,000 (80% of $50,000). Therefore, gross income after the deduction is $710,000. Subtract $725,000 in expenses to arrive at NOL of $15,000.
Thanks, Rain. I found the answer too when I was reviewing that chapter again. I thought the limitation was involved but realized it isn't if a NOL is involved. Posted by Stephanie on 02/24/2012 @ 9:10 AM
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
The Best Strategy
EA Study Guide + Practice Exams
Learn more about FFA's IRS EA study guide and UNLIMITED Practice Exams.