Question

Samaa is a full-time teacher at the local high school. in the summer, she operates a farm as a part-time business. during the current year, her farm experienced a loss of $14,000. how can samaa use that loss in the most effective manner? multiple choice

a. deduct the full amount of the loss under 3d, against all sources of income.
b. deduct $7,000 against all sources of income under 3d and carry the remainder forward to be used against farming income.
c. deduct $8,250 in the current year against all sources of income in 3d and carry the remaining amount back 3 years forward 20 years to be used against farming income.
d. the deduction is not allowed by the anti-avoidance rules.

Answer 1

Samaa can deduct $8,250 in the current year against all sources of income under section 3d and carry forward the remaining $5,750 to be used against farming income. This is known as the "carry-back" option, which allows her to offset the current year's loss against her income from the previous two years and carry forward any remaining loss for up to 20 years.

Explanation:

In the current year, Samaa's farm incurred a loss of $14,000. Under section 3d of the Income Tax Act, she is eligible to claim a deduction for this loss. However, she has the option to use this loss in the most effective manner by choosing between three methods: 1. Deduct the full amount of the loss against all sources of income: This option allows Samaa to offset the entire loss against her income from other sources, such as her salary as a teacher. However, this method may result in a lower taxable income in the current year, but a higher taxable income in future years when she has farming income.

2. Deduct $7,000 against all sources of income and carry forward the remainder: This option allows Samaa to claim a deduction of $7,000 against all sources of income in the current year and carry forward any remaining loss for future years. This method may result in a lower taxable income in the current year and a lower taxable income in future years when she has farming income.

3. Deduct $8,250 in the current year against all sources of income and carry back the remaining amount: This option allows Samaa to claim a deduction of $8,250 against all sources of income in the current year and carry back any remaining loss to be set off against her income from the previous two years. This method may result in a lower taxable income in the current year and potentially no taxable income in future years when she has farming income. In Samaa's case, choosing the "carry-back" option is more beneficial as it allows her to offset her current year's loss against her income from previous years when she had higher taxable income. This will result in a lower tax liability for the current year and potentially no tax liability for future years when she has farming income. By carrying forward any remaining loss for up to 20 years, Samaa also has flexibility to use this loss against future farming income if needed.