Question

In the computation of a net operating loss, each of the following items is added to the negative taxable income except:

a. Hobby losses.
b. Theft losses.
c. Losses from the operation of a business.
d. Casualty losses.
e. Losses from the operation of a trade.

Answer 1

Hobby losses are not added back to negative taxable income in the computation of net operating loss; this is because hobby losses are not business activities engaged in for profit. Other legitimate business losses, such as theft, business operation, casualty, and trade operation losses, are considered when calculating a net operating loss.

Step-by-step explanation:

In the computation of net operating loss, certain items are added back to negative taxable income to figure the overall amount of loss that can be utilized in other tax periods. Among the options provided, hobby losses are the exception. Hobby losses are not typically considered a business activity engaged in for profit and are thus not added back to the net operating loss computation.

Net operating losses can be an important tax consideration for businesses, especially when they are facing challenging economic conditions that result in financial losses. Understanding what may be included or excluded in these calculations is crucial for accurate tax reporting and strategic planning to minimize the negative financial impacts associated with running a business.