Destry, a single taxpayer, reported the following on his U.S. Individual Income Tax Return (Form 1040):
Income:
Wages $5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions:
Personal exemption $ 4,000
Standard deduction 6,300
Net business loss 16,000
Net short-term capital loss 2,000
What is Destry's net operating loss that is available for carryback or carryforward?
A. $7,000
B.$9,000
C.$15,700
D.$16,000
Answer A
The interest income (nonbusiness income) is offset by nonbusiness expenses, up to the amount of nonbusiness income. The standard deduction is a nonbusiness expense for this purpose.
IRC Section 172(d)(4)
The net capital loss (nonbusiness) is only deductible to the extent it is offset by nonbusiness capital gains.
IRC Section 172(d)(2)
Personal exemptions and unused personal deductions are added back to taxable income in arriving at net operating losses so they do not increase the carryback or carryforward.
The net business loss must be offset by wages and rental income for this year.
IRC Section 172
Wages of $5,000 plus net rental income of $4,000 minus the loss of $16,000 equals a net operating loss carryback or carryforward of $7,000.
Why are W2 wages included in this calculation? I thought the rental income would only be offset against the business losses. I assume the “business losses” were part of operating the rental business?
4 for 4
FAR 85
AUD 94
BEC 86
REG 90
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