CPA Exam — Tax Compliance and Planning (TCP)

Corvid Inc., a calendar-year C corporation, has a $500,000 net operating loss carryforward from 2021. Its 2025 taxable income before any NOL deduction is $400,000. What is its 2025 NOL deduction and the carryforward to 2026?

1. A$200,000 deducted; $300,000 carried forward
2. B$500,000 deducted; nothing carried forward
3. C$320,000 deducted; $180,000 carried forwardCorrect
4. D$400,000 deducted; $100,000 carried forward

Why: For NOLs arising in tax years beginning after 2017, IRC §172(a)(2) limits the deduction to 80% of taxable income computed without the NOL deduction: 80% × $400,000 = $320,000. The remaining $180,000 carries forward indefinitely under §172(b)(1)(A). Deducting $400,000 ignores the 80% limit. Deducting $500,000 exceeds taxable income. $200,000 applies a 50% limit that does not exist.

In 2025, Dana exercises an incentive stock option (ISO) to buy 1,000 shares at the $20 option price when the shares are worth $50 each. She still holds the shares at year-end. How does the exercise affect her 2025 return?

1. ANo regular taxable income and no AMT effect until she sells
2. B$30,000 of wage income for both regular tax and AMT
3. CNo regular tax income; a $30,000 AMT adjustmentCorrect
4. D$30,000 of capital gain for regular tax, with no AMT effect

Why: Under IRC §421(a), exercising an ISO produces no regular-tax income. IRC §56(b)(3) switches §421 off for AMT, so the $30 × 1,000 = $30,000 spread becomes a positive AMT adjustment in the year of exercise. Wage treatment belongs to a nonstatutory option or a disqualifying disposition. Exercise is not a sale, so no capital gain arises. Saying there is no AMT effect until sale ignores §56(b)(3), which reaches the spread when the shares are held past year-end.