🎯Net Operating Loss: 7 MCQs

Responses

1. 

   Ayushi Saxena 7 June 2024

   During the year 20X3, Mary earned a salary of $48,000 from her work as an accountant at Zingo Corporation. In addition, she reported a dividend income of $3,000 from an investment. Mary decided to itemize her deductions because she was able to deduct $55,000 of casualty loss resulting from a federally declared disaster. Assuming that the casualty loss is her sole itemized deduction during the year, determine the amount of net operating loss (NOL) that Mary may report on her tax return for the tax year 20X3. —————————————————————I this question, why have we included dividend income and salary it was not mentioned if it was from a business

   1. 

      Maroun, CPA 10 June 2024

      Hello Ayushi,

      To have an NOL, a taxpayer’s loss must generally be caused by specific types of deductions such as trade or business losses, casualty and theft losses from a federally declared disaster, moving expenses, or rental property losses. However, the calculation of an NOL involves comparing these deductible losses against the total income from all sources, not just income from a business.

      When calculating the NOL, the IRS requires you to consider your total income, which includes all forms of income such as salary, dividends, and any other income, regardless of their source. This means that even if the losses are from specific deductible categories, the total income used in the calculation includes everything.

      I hope this makes sense!

2. 

   Ayushi Saxena 7 June 2024

   in Ques 3 again the sale of stock in a small business investment company is not to be included that why have we included it?

   1. 

      Maroun, CPA 10 June 2024

      Hello Ayushi,

      According to the IRS Publication 536, the following items are not allowed when figuring an NOL:
      – Capital losses in excess of capital gains.
      – The section 1202 exclusion of the gain from the sale or exchange of qualified small business stock.
      – Nonbusiness deductions in excess of nonbusiness income.
      – The NOL deduction.
      – The section 199A deduction for qualified business income.

      Ordinary loss on the sale or exchange of stock in a small business corporation or a small business investment company is specifically cited by the IRS as a deduction connected to
      a trade or business. This is the link for more information: https://www.irs.gov/publications/p536#en_US_2023_publink1000177329

      I hope this helps!

3. 

   Djokovic Nadal Avengers 9 October 2024

   Hello team,

   Please advise, for question 5 is it mandatory I look at the below requirements while calculating the NOL:

   The second step is to determine whether the taxpayer has an NOL and its amount by eliminating the effect of any of the following disallowed items:

   Capital losses in excess of capital gains.
   Nonbusiness deductions in excess of nonbusiness income.
   NOL deductions from previous years.
   Section 199A deduction for qualified business income.
   Section 1202 exclusion of the gain from the sale or exchange of qualified small business stock.

   1. 

      Maroun, CPA 11 October 2024

      Hello Djokovic,

      According to the IRS Publication 536, the following items are not allowed when figuring an NOL:
      – Capital losses in excess of capital gains.
      – The section 1202 exclusion of the gain from the sale or exchange of qualified small business stock.
      – Nonbusiness deductions in excess of nonbusiness income.
      – The NOL deduction from previous years.
      – The section 199A deduction for qualified business income.

      So, yes you have to make sure that the above items were not included in the computation of the current’s year NOL.

      I hope this helps!

4. 

   Djokovic Nadal Avengers 9 October 2024

   Hello Farhat team, for question 7 I am getting -3400 as NOL, anything I am doing wrong? thanks in advance

   Income (broadly defined)
   Operating income
   (+) Salary
   (+) Dividend Income 4,000
   (+) Interest Income
   (+) Alimony received 5,000
   (+) Non business income/LTCG
   (+) Business Capital Gain 6,900
   (+) Business Capital Loss (17,250)
   (-) Operating expenses

   Gross Income (1,350)
   Less: Deductions for AGI
   (-) Alimony paid
   (-) Business loss from partnership (15,000)
   (-) Ordinary loss
   (-) Contributions to traditional IRA –

   AGI (16,350)
   Deductions from AGI
   Less: Standard or Itemized Deductions
   (-) Standard Deduction 12,950 12,950
   Personal Damages (Schedule A)
   Subtract $100 per casualty
   Subtotal
   10% of AGI Floor
   (-) Itemized Deduction (Home Mortgage
   (-) Casualty loss on Schedule. A
   Taxable income (3,400)
   Capital loss in excel of capital gains 10,350
   Non business deductions in excess of non business income 3,950
   NOL deductions from previous years
   Section 199A deduction for QBI
   Section 1202 exclusion of Gain from QBI stock
   Disallowed Item Calc Total: 14,300
   Taxable income – disallowed amount
   Net Operating Loss (3,400)

   1. 

      Maroun, CPA 11 October 2024

      Hello Nadal,

      The question does not provide the full list of items reported on Nancy’s tax return. Instead, it says that Nancy reported the following items, meaning it’s a partial list that focuses on the items relevant to calculating her NOL.

      The question specifically highlights the items that should be excluded when calculating the NOL, such as:
      – Capital losses in excess of capital gains: $10,350 ($17,250 – $6,900)
      – Nonbusiness deductions in excess of nonbusiness income: $3,950 (Standard deduction $12,950 – Alimony $5,000 – Dividend income $4,000)
      These two items, totaling $14,300, should be added back to Nancy’s loss to compute the correct NOL.

      I hope this makes sense!

5. 

   Vinny D 19 October 2024

   Question 2 answer explanation states that moving expenses may be considered for NOL. Can you please (1) explain and (2) provide an example? Thank you so much!

   1. 

      Maroun, CPA 22 October 2024

      Hello Vinny,

      Currently, only active-duty military members moving due to a military order can claim moving expenses as a deduction. The deductible moving expenses for these military members can be taken into consideration when computing an NOL.

      I hope this makes sense!

6. 

   Prem Lalwani 23 April 2026

   In Question 7 there is a capital loss of -10,350 from which we can deduct 3000 from other sources of income right ?

   1. 

      Maroun, CPA 24 April 2026

      Hello Prem,

      Yes, for regular taxable income, a net capital loss can offset ordinary income up to $3,000.

      However, for NOL purposes, the rule is different. When computing an NOL, capital losses are allowed only to the extent of capital gains. Thus, the $3,000 capital loss deduction against ordinary income is not allowed in the NOL calculation.

      That is why, in this question, the full excess capital loss is added back:
      Capital loss = 17,250
      Capital gain = 6,900
      Excess capital loss = 10,350

      That $10,350 is disallowed for NOL purposes and must be added back.

      Hope this helps!