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REG CPA Practice Questions: C Corporation NOLs and NCLs
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May 3, 2024
In this video, we walk through 4 REG CPA exam practice questions teaching the rules around and how to calculate C Corporation NOLs and NCLs. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-c-corporation-nols-and-ncls/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:46 Question 1: The Rules for C Corp NOLs 02:43 Question 2: Calculating an NOL 04:04 Question 3: Net Capital Loss Rules for C Corporation 05:38 Question 4: How NOLs and NCLs Interact 07:15 Pillar Topics
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0:00
Welcome to another reg walkthrough video. I'm Logan, and in today's video, we're going to be going
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over net operating and net capital losses for C corporations. And we're going to be doing that
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the Super Fast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, and if you want to learn more, make sure you go
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to superfastcpa.com and check out our one-hour free training webinar, where we go over the key
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ingredients to passing the CPA exam. Again, it's one hour, it's free, it will save you so much time
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in struggling with your process. The link will be in the description of this video
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Make sure you check out our Superfast CPA app where we not only have audio notes and review notes
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but also five-question mini-quises that you can access easily on your phone
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throughout the day to continue practicing. With all that said, let's dive straight into the questions
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All right, here's question one. Zebra Tech, Inc., a C-Corporation, has incurred a net operating loss or NOL
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of $600,000 in its 2023 fiscal year. There were no other capital gains or losses for the year
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Based on the tax laws applicable to the 2023 fiscal year, how can Zebra Tech Inc. utilize this
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NOL? So if you don't really know what an NOL is, that's okay. That's what we're going to learn in this video
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So let's go ahead and go straight into the answer to learn how this works. Okay, and it looks like you could carry forward the NOL indefinitely to offset up to 80% of taxable income in future years
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So let's learn about it. Following the Tax Cuts and Jobs Act, or TCJA of 2017, the rules for NOLs were significantly changed
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The ability to carry back NOLs was eliminated for most corporations, and the carry forward period
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was extended indefinitely, with the provision that NOLs could only offset up to 80% of taxable income
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in future years. The Coronavirus Aid Relief and Economic Security or CARES Act of 2020 temporarily
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changed these rules for the 2018, 2019, and 2020 tax years by allowing a five-year carryback
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and removing the 80% limitation. However, for the 2023 fiscal year and all future years until this rule changes
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the provisions of the TCJA apply once again This means that Zebra Tech Inc cannot carry back the NOL to previous years but can carry it forward indefinitely to offset up to 80 of its taxable income in future years Okay so if a business has a net operating loss
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like their expenses exceed their income, that loss can only be carried forward. It can't be
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carried back anymore unless it was in the years of 2018, 2019, and 2020. Other than that
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it can only be carried forward and can only be used to offset up to 80% of taxable income in the
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future years that it's used. Okay, that's how NOLs work. Let's do one more question about NOLs just to
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help it sink in. Okay, here's question two. Modern Tech, a C corporation, has provided its
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income statement for the tax year 2023. Gross revenue from sales of $500,000, cost of goods sold for
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$300,000, salaries and wages of $120,000, rent expenses for $30,000, interest expense for $20,000
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and depreciation expense for $50,000. Determine modern tech's net operating. income or loss for the tax year 2023, and select the option that correctly applies the net
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operating loss rules for a C corporation if there is a net operating loss. So you most likely know
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how to figure out income and expenses and see how much is left over. So take a second, do the
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calculation for this and then pick the correct answer. You most likely should be able to
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just based off the question we did previously. And when you're ready, come back and we will look at the
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answer together. Okay, and the answer was net operating loss of $20,000, which can be
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be carried forward indefinitely to offset up to 80% of taxable income in future years
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So as you probably figured out, you net all the income and the expenses altogether
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and that gives you a net operating loss of $20,000 when you subtract the expenses from
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the income. And so we take that $20,000 as a net operating loss and it can be carried
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forward indefinitely to offset up to 80% of taxable income. All right, let's go to the next
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question to learn about net capital losses for a C corporation. Okay, here's question three
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A.C.B Corporation, a C corporation, had the following capital gains and losses during the tax year
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A short capital gain of short capital losses of long capital gains of Long capital losses of Given these figures we have to calculate ACB corporations net capital loss for the tax year and determine how this loss can be treated under
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the current tax regulations for C corporations. Okay, we don't really know how net capital losses
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work for C corporations, so let's go ahead and go to the answer to learn how this works
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Okay, and the answer is that it's a net capital loss of $45,000, and it can be carried back three
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years and forward five years. So let's learn about this. To solve this, you first need to calculate the
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net short term and long term capital losses. So the net short term loss is $15,000 from this
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calculation here. And the net long term capital loss is $30,000. And here's the calculation here
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You add those together to get your net loss, your net capital loss. For C corporations, net capital
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losses can't be used to offset ordinary income and can only be carried back or forward to offset capital
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gains. They have a three-year carryback and can be carried forward five years to offset capital gains in
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future years. They are carried as short-term capital losses. Okay, so that's basically how it works. There's
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no TCJA rules to remember with this. For C corporations, whatever the net capital loss is
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whether it was short-term or long-term, it's carried forward as a short-term capital loss. Okay
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let's do one more question to kind of put it all together. Okay, here's question four. KSAR, Inc., a C corporation
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has provided the following financial data for the tax year 2023. Gross income from services of $750,000
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operating expenses, including salaries, rent, and utilities of $820,000, short-term capital gains of $40,000
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and net capital loss carryover from the previous year of $30,000. So we have to calculate KSR Inc's net operating loss for the 2023 tax year
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Okay, so how do these work together? Pause the video, see if you can figure out how a net operating loss
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and a net capital loss might affect each other. And when you're ready, come back and we will look at the answer
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Okay, here is the answer, $60,000. That's the net operating loss that they'll have
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So let's calculate it. So you take the gross income, you would add the capital gains
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those would be included in gross income because gross income includes pretty much all income And then this net capital loss carry over from the previous year is netted against the capital gain So that means that the capital gain is actually only instead of
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And then you subtract the operating expenses. And that gives you a total net operating loss of $60,000
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Now, as you'll notice here, a capital loss carryover from a previous year, if it affects the capital
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gains in the current year, then that means that it can affect how much of a net operating loss is a
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because capital gains are typically included in gross income. Okay, that's pretty much it for net operating losses and net capital losses for C corporations
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Not a super difficult subject. To finish the video, let's do one more part of the super fast CPA strategy, which is something
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called pillar topics. Now, the idea behind pillar topics is, as you're going through the question to learn the
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material, you will notice the topics that come up multiple times. You know, you see it in three or four of the questions that you did
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these are the things that are obviously important according to your review course that you should know for the CPA exam
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So let's go ahead and look at the pillar topics for this video. Okay, here are the pillar topics
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Net operating losses can now only be carried forward indefinitely and can only offset up to 80% of taxable income
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They used to be carried back two years and forward 20 years, but that was changed with the tax cuts and jobs act
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During 2018, 2019 and 2020, however, no else could be carried back five years and the 80% rule was lifting
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now that we're past those years, all net operating losses that occur in years after 2020
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will be treated the way that the Tax C C C C C Corsions, which is carried forward indefinitely
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and can only offset up to 80% of taxable income. And then net capital losses for a C corporation
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can only offset capital gains and are carried back three years or forward five years to C corporations
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And those are the pillar topics, and that's the end of the video. Thanks for watching
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One more reminder to go check out our free one-hour training webinar. on superfastcpa.com. It will save you a ton of time with your process. Also, check out our
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Superfast CPA app where we have five-question mini quizzes so that you can continually practice
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all throughout your day and be learning. If you liked this video, make sure to like it and leave a
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comment. I hope this was helpful, and I will see you in the next video
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