Net Operating Loss. During the year, Karen, a single taxpayer, reports the follo
ID: 2346283 • Letter: N
Question
Net Operating Loss. During the year, Karen, a single taxpayer, reports the followingincome and expense items relating to her interior design business:
Revenues $52,000
Cost of goods sold 41,000
Advertising 3,300
Office supplies 1,700
Rent 13,800
Contract labor 28,000
Karen also worked part-time during the year, earning $13,500. She reports a long-term
capital gain of $4,200, and a short-term capital loss of $3,800. Her itemized deductions
total $5,200.
a. What is Karen’s taxable income or loss for the year?
b. What is Karen’s NOL for the year?
Explanation / Answer
a. For her business, she had a loss of 35,800 (the revenue minus the expenses listed). She also had income from a par-time job of 13,500, a net capital gain of 400, and itemized deductions of 5,200. Just using these figures, her taxable income would be -35,800 + 13,500 + 400 - 5200 = -27,1000, a loss of -27,100. If you knew what year it was, you could probably take off her exemption as well, although it won't do her any good. b. For the NOL, you start with her negative taxable income, -27,100, add back any exemptions she had taken (but we did not take any off that -27,100). Then you add back nonbusiness deductions over nonbusiness income, which is the itemized deduction minus the nonbusiness capital gain, 5200-400 or 4800, and you add this back, so-27,100 + 4,800 = -22,300, which is the NOL