Lake Michigan Inc. excluded a $125,000 discharge of indebtedness from gross income. Before the exclusion, it had had an NOL of $95,000 and a general business credit carryforward of $60,000. How much of the general business credit must be reduced?
A-$60,000
B-$30,000
C-$10,000
D-$20,000
To determine how much of the general business credit must be reduced, we need to consider the interaction between the discharge of indebtedness exclusion and the net operating loss (NOL) and general business credit carryforward.
First, let's calculate the taxable income before the exclusion by subtracting the NOL from the discharge of indebtedness:
Taxable income before the exclusion = Discharge of Indebtedness - NOL
= $125,000 - $95,000
= $30,000
Next, let's see if this amount exceeds the general business credit carryforward. If it does, the excess will be the amount that needs to be reduced from the general business credit:
Excess taxable income = Taxable income before the exclusion - General business credit carryforward
If the excess taxable income is greater than or equal to zero, then the general business credit must be reduced by the excess taxable income. Otherwise, no reduction is required.
In this case:
Excess taxable income = $30,000 - $60,000
= -$30,000
Since the excess taxable income is less than zero, no reduction is required from the general business credit.
Therefore, the answer is B) $30,000