Chapter 11, Problem 1MCQ

Ironwood Corporation has ordinary taxable income of $65,000 in 2019, and a short-term capital loss of $15,000. What is the corporation's tax liability for 2019?

1. $7,500

$5,250

$10,500

$13,650

None of the above

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

To choose: The Corporation’s tax liability.

Answer to Problem 1MCQ

The option ‘d. $13,650’ is correct.

Explanation of Solution

In a Corporation from a taxation point of view, there is no difference between long-term and short-term loss capital loss. If a corporation has any capital gains then it shall be clubbed in ordinary income. For corporations having capital losses, the losses are not permissible to be deducted against ordinary business income. In the year of capital loss, the loss is permissible to be adjusted against capital gains only, if any amount remains to be adjusted then the remaining amount is allowed to be deducted in the previous 3 years and forward 5 years. Whereas a capital loss of long term nature that is not fully deductible in the same year is considered as a capital loss of short-term nature and can be used for adjustments against both capital losses whether it is long term nature or short-term nature.

Thus, in the given situation the taxpayer that is a corporation having $65,000 ordinary income and also has a $15,000 capital loss of short-term nature. So here the corporation cannot set-off its capital loss from its ordinary taxable income for $15,000. Thus, the corporation will be taxed only on ordinary taxable income at a constant rate of tax of 21 percent. The capital loss amount of short-term nature will be carry forwarded to the next 5 years. So, the tax liability is will be determined as follows:

  $\begin{array}{l}\text{Tax liability=\$65,000}\times \text{0}\text{.21}\\ \text{ =\$13,650}\end{array}$

Therefore, the option‘d’ is correct.