Question

Tatoo Incorporated reported a net capital loss of $13,000 in 2020. The company had a net capital gain of $4,300 in 2018 and $3,000 in 2017. In 2019, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover to 2021 remaining after it applies the carryback?

A) $4,700.
B) $5,700.
C) $8,700.
D) $13,000.

Answer 1

After applying the capital loss carryback to the net capital gains of previous years, Tattoo Incorporated has a capital loss carryover to 2021 of $5,700. Therefore correct option is B

Step-by-step explanation:

To determine Tatto Incorporated's capital loss carryover to 2021 after applying the carryback, we need to calculate how the net capital loss of $13,000 from 2020 can be applied against the net capital gains from previous years.

Tatoo Incorporated can carry the net capital loss back three years to offset gains, starting with the earliest year first.

For 2017, there was a net capital gain of $3,000. Then, for 2018, there was a net capital gain of $4,300. Finally, in 2019, despite the net operating loss, there was a net capital gain of $1,000.

After applying the carryback as follows:

• 2020 loss ($13,000) - 2017 gain ($3,000) = $10,000 remaining loss
• 2020 remaining loss ($10,000) - 2018 gain ($4,300) = $5,700 remaining loss
• The remaining loss is more than the 2019 gain, so we do not need to calculate further for 2019.

After utilising the net capital gains from 2017 and 2018, we find that Tatoo can carry forward a capital loss of $5,700 to 2021.

Therefore, the correct answer is B) $5,700.