Question

Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000 from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of operation, the business had an operating loss of $120,000. The business incurred an operating loss of $45,000 in the second year and had operating income of $25,000 in the third year. What is the maximum carryforward loss deductible against the third year’s income? Assume that Carmen materially participates in the business.

a. $20,000
b. $15,000
c. $30,000
d. $45,000
e. $120,000

Answer 1

Answer: A

Step-by-step explanation:

Carryforward Loss is a principle which deducts the operating loss in a business year as an expense from the operating income of subsequent years. This is to reduce the tax a business pays, if the business had suffered losses in previous years.

Businesses can carryforward their loss into subsequent years for up to 20 years but there is a cap on the amount they can deduct. The maximum loss deductible is 80% of the operating income in any given year.

The operating income in the third year is $25,000

`(80)/(100) 25000`

=$20,000