Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000 from local national bank. carmen signed the note payable as a personal guarantor. in the first year of operation, the business had an operating loss of $120,000. the business incurred an operating loss of $45,000 in the second year and had operating income of $25,000 in the third year. what is the maximum carryforward loss deductible against the third year’s income? assume that carmen materially participates in the business.
a. $20,000
b. $15,000
c. $30,000
d. $45,000
e. $120,000

A

Explanation:

Carryforward Loss is a principle which deducts the operating loss in a business year as an expense from the operating income of subsequent years. This is  to reduce the tax a business pays, if the business had suffered losses in previous years.

Businesses can carryforward their loss into subsequent years for up to 20 years but there is a cap on the amount they can deduct. The maximum loss deductible is 80% of the operating income in any given year.

The operating income in the third year is $25,000

=$20,000

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