Question

ASSUME ALL CORPORATIONS ARE C CORPORATIONS
Corporation X in its second year of operations had the following capital gain/losses:
Capital gains net =$ 5,000.
In year 1, Corp X had a net capital loss of $7,000
Discuss the tax treatment of these capital transactions

Answer 1

In any given tax year, a C corporation's capital losses exceed its capital gains, the excess loss may not be deducted in that year. Instead, the current year's excess loss is carried to other tax years in a specific order and deducted from net capital gains in those years (if any gains exist)

Order to Follow When Carrying Excess Capital Losses back and Forward:

C corporations must follow a specific order when carrying capital losses back and forward.C corporations may carry a net capital loss back 3years and forward up to a maximum of 5 years. If part of a capital loss remains after carrying it forward up to 5 years, it is lost forever.

C corporation's excess capital loss in any given year is carried to other years in the following order:

• First, 3 years prior to the loss year
• Next, 2 years prior to the loss year
• Then, 1 year prior to the loss year
• Finally, any loss remaining is carried forward for 5 years
  • If after carrying back a net capital loss 3 years and forward 5 years, part of the loss still remains, it is lost forever.

In the given question, for Corporation X there is a capital gain in Year 2 of $5000. In Year 1, there is a capital loss of $7000.

This capital loss is reduced from the capital gain of $5000.

Therefore, remaining capital loss of $2000 ($7000 - $5000) is carried forward to another 4 years.

NOTE:- The carried forward loss of $2000 is lost forever if there is no capital gain in the next 4 years.

Assuming there is no capital gain for the prior 3 years of the year 1.