A C Corporation has a Net Capital Loss of $10,000 in Year 4. In Years 1, 2, and 3, it had Net Capital Gains of $2,000, $3,000, and $1,000 respectively. How is the Year 4 loss utilized?

Answer options:

Deducted $3,000 in Year 4; remainder carried forward.

Carried back to Year 1 ($2,000), Year 2 ($3,000), Year 3 ($1,000); remaining $4,000 carried forward.

Carried forward 5 years only.

Carried back to Year 3 ($1,000), Year 2 ($3,000), Year 1 ($2,000).

How to approach this question

Corporate Rule: Carry back 3 years, Carry forward 5 years. Cannot deduct against ordinary income. Apply to earliest year first.

Full Answer

B.Carried back to Year 1 ($2,000), Year 2 ($3,000), Year 3 ($1,000); remaining $4,000 carried forward.✓ Correct

Carried back to Year 1 ($2,000), Year 2 ($3,000), Year 3 ($1,000); remaining $4,000 carried forward.

IRC §1212(a). Corporations carry net capital losses back 3 years and forward 5 years. The loss must be applied to the earliest year first (Year 1, then 2, then 3).

Common mistakes

Applying individual rules ($3k deduction) or carrying back to the most recent year first.

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