A C Corporation has a Net Operating Loss (NOL) of $100,000 generated in Year 2. In Year 3, the corporation has taxable income of $80,000 before the NOL deduction. The applicable NOL limitation is 80% of taxable income. What is the corporation's taxable income in Year 3 and the NOL carryforward to Year 4?

Answer options:

Taxable Income: $0; Carryforward: $20,000

Taxable Income: $20,000; Carryforward: $40,000

Taxable Income: $16,000; Carryforward: $36,000

Taxable Income: $16,000; Carryforward: $20,000

How to approach this question

1. Calculate max deduction: 80% * Year 3 Income. 2. Compare with available NOL. 3. Deduct lesser amount. 4. Calculate remaining NOL.

Full Answer

C.Taxable Income: $16,000; Carryforward: $36,000✓ Correct

IRC §172. The deduction for post-2017 NOLs is limited to 80% of taxable income. 80% of $80,000 = $64,000. The corporation deducts $64,000. Taxable income becomes $16,000. The unused NOL ($100,000 - $64,000) = $36,000 is carried forward indefinitely.

Common mistakes

Deducting the full NOL to reduce income to zero; calculating the carryforward incorrectly.

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