Net Operating Losses - Spidell Publishing, Inc. · · 2015-11-06NET OPERATING LOSSES . ... •...

Net Operating Losses

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NET OPERATING LOSSES

Course objectives: The purpose of this course is to provide a guide to essential information for net operating losses. Topics addressed include: calculating statutory loss, nonbusiness vs. business capital losses, computing NOLs for business taxpayers, NOL filing details, the alternative minimum tax NOL, modified taxable income, and much more.

After completing this course, you will be able to:

• Determine how to calculate a net operating loss when making a nonbusiness capital loss modification

• Choose what is allocable to a taxpayer’s business when calculating statutory loss • Identify the appropriate carryback period for qualified disaster losses • Select the itemized deductions that require recalculation when determining tax liability for a

carryback year • Recall how much of a net operating loss can be absorbed • Identify adjustments when calculating an alternative minimum tax NOL

Category: Taxes Recommended CPE Hours: CPAs/PAs — 2

EAs/CRTPs — 2 Federal Tax Law Level: Basic Prerequisite: None Advanced Preparation: None Expiration Date: November 2016


©2015 Spidell Publishing, Inc.®

TABLE OF CONTENTS

Introduction .............................................................................................................................................. Page 1 Part I — Compute Current Year Net Operating Losses ..................................................................... Page 1 Statutory Loss .................................................................................................................................... Page 1 Example: Form 1045 (2011) Schedule A - NOL— Barry Berry ................................................... Page 6 IRC Section 172 (d) illustrated on Form 1045 Schedule A ........................................................... Page 9 Example: Form 1045 (2014) Schedule A - NOL— Carl McGallo .............................................. Page 11 Individual NOL Quick Worksheet ............................................................................................... Page 12 Part II — Determine the Carryback and Carryover Periods for the Net Operating Loss ............ Page 14

Standard Carryback Period ........................................................................................................... Page 14 Waiving the Carryback Period ...................................................................................................... Page 17 Sample Election Statements ........................................................................................................... Page 18 Carryover Period ............................................................................................................................. Page 21

Part III — Compute the Net Operating Loss Absorption in a Carryback Year and Intervening Years .................................................................................................................................................................. Page 21

Example: Form 1045 (2014) Application for Tentative Refund ................................................ Page 29 How is the NOL Carried Back? ..................................................................................................... Page 34

Part IV — Special Issues with Join and Separate Tax Returns, Deceased Spouses & Divorced Taxpayers ......................................................................................................................................... Page 36

Part V — Getting the Carryback Claim Accepted By the IRS the First Time ................................ 0 Part VI — Alternative Minimum Tax Considerations ...................................................................... Page 44 Part VII — California ............................................................................................................................. Page 46 Example: Form 3805V Section C – Election to Waive Carryback ............................................. Page 47 Example of California NOL Use ................................................................................................... Page 50


© Mark Seid, CPA, EA, USTCP - 1 - 2015

INTRODUCTION This course is designed to provide a guide to federal and California net operating losses. The materials will cover the computation of a current year net operating loss, determination of the property carryback and carryover periods, absorption of a net operating loss (NOL) in carryback and intervening years, issues created by separate and joint NOLs, and California conformity issues. IRC §172 – Net Operating Loss Deduction. Subsection Titles. IRC §172(a) – Deduction Allowed IRC §172(b) – Net Operating Loss Carrybacks and Carryovers IRC §172(c) – Net Operating Loss Defined IRC §172(d) – Modifications IRC §172(e) – Law Applicable to Computations IRC §172(f) – Rules Relating to Specified Liability Losses IRC §172(g) – Rules Relating to Bad Debt Losses of Commercial Banks IRC §172(h) – Corporate Equity Reduction Interest Losses IRC §172(i) – Rules Relating to Farming Losses IRC §172(j) – Rules Relating to Qualified Disaster Losses IRC §172(k) – Cross References

PART I – COMPUTE CURRENT YEAR NET OPERATING LOSS STATUTORY LOSS The starting point for calculating a net operating loss is the “statutory loss.” Statutory loss is defined in IRC §172(c).

IRC §172(c) Net Operating Loss Defined. – For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).

“Deductions allowed by this chapter” IRC §172 is located in: Title 26 – Internal Revenue Code

Subtitle A – Income Taxes Chapter 1 – Normal Taxes and Surtaxes (§§1-1400U)



“Gross income” Gross income is defined in IRC §61 – “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived…” “Modifications specified in subsection (d)” No deduction is allowed for a net operating loss deduction. §172(d)(1). No deduction is allowed for capital losses. §172(d)(2)(A). No exclusion is allowed for gains on small business stock. §172(d)(2)(B). No deduction is allowed for personal exemptions. §172(d)(3). No nonbusiness deductions in excess of nonbusiness income. §172(d)(4). o No taxable income limitation on dividends received deduction if the full deduction results

in a loss. §172(d)(5). o No adjustments to REIT taxable income for adjustments in §857(b)(2). §172(d)(6). No manufacturing deduction (domestic production activities deduction) is allowed.

§172(d)(7). §172(d)(1) Modification – Net Operating Loss Deductions To calculate the statutory loss no deduction is allowed for a net operating loss deduction. A net operating loss deduction is either a carryover from a prior year or a carryback from subsequent year. §172(d)(2)(A) Modification – Capital Losses (nonbusiness) To calculate the statutory loss, no deduction is allowed for capital losses. Capital gains and losses need to be divided into two classes in order to make this calculation: (1) business capital gains and losses and (2) nonbusiness capital gains and losses. Business capital gains cannot be offset by nonbusiness capital losses.



Example 1 - IRC §172(d)(2)(A) Modification Joe is a single taxpayer, does not itemize and has only the following income and deductions: Schedule C loss $ (30,000) Business capital gain $ 25,000 Nonbusiness capital gain 15,000 Nonbusiness capital loss (35,000) Net capital gain 5,000 Adjusted Gross Income $ (25,000) How much is Joe’s §172(d)(2)(A) modification? Separate Joe’s business capital gains and losses from his nonbusiness capital gains and losses. Business capital gain $ 25,000 Nonbusiness capital gain $ 15,000 Nonbusiness capital loss (35,000) Net nonbusiness capital loss $ (20,000) Joe’s §172(d)(2)(A) modification is $20,000. Because §172(d)(2)(A) does not allow any capital losses to be considered, Joe must add back $20,000 to calculate his net operating loss. §172(d)(2)(A) Modification – Capital Losses (business) The Code is silent on the separation of business and non-business capital gains and losses. However, Treasury Regulation §1.172-3(a)(2) provides guidance in two clauses. First, Treasury Regulation §1.172-3(a)(2)(ii) reads, “The amount deductible on account of nonbusiness capital losses shall not exceed the amount includible on account of nonbusiness capital gains.” This clause appears to be parallel with the with the IRC §172(d)(2)(A) modification. Second, Treasury Regulation §1.172-3(a)(2)(i) reads, “The amount deductible on account of business capital losses shall not exceed the sum of the amount includible on account of business capital gains and that portion of nonbusiness capital gains which is computed in accordance with paragraph (c) of this section.” So now we follow the regulation to §1.172-3(c) where the calculation gets more complicated.



§1.172-3 (c) Determination of portion of nonbusiness capital gains available for the deduction of business capital losses.— In the computation of a net operating loss a taxpayer other than a corporation must use his nonbusiness capital gains for the deduction of his nonbusiness capital losses. Any amount not necessary for this purpose shall then be used for the deduction of any excess of ordinary nonbusiness deductions over ordinary nonbusiness gross income. The remainder, computed by applying the excess ordinary nonbusiness deductions against the excess nonbusiness capital gains, shall be treated as nonbusiness capital gains and used for the purpose of determining the deductibility of business capital losses under paragraph (a)(2)(i) of this section.

This paragraph is difficult to understand without an illustrated example. Barry Berry sold bad berries in 2013 and incurred a loss of $50,000 in his berry business. During 2013 he also had interest income of $7,500 and personal residence interest of $9,000. He had and nonbusiness capital losses of $7,000; nonbusiness capital gains of $13,000 and a business capital loss of $5,000. The first part of the calculation requires that nonbusiness capital gains are offset by nonbusiness capital losses. STEP 1 – Calculate excess nonbusiness capital gains: Nonbusiness capital gains $ 13,000 Nonbusiness capital losses (7,000) Excess nonbusiness capital gains 6,000 STEP 2 – Calculate excess ordinary nonbusiness deductions: Ordinary nonbusiness deductions 9,000 Ordinary nonbusiness income 7,500 Excess ordinary nonbusiness deductions 1,500 STEP 3 – Calculate excess nonbusiness capital gains over excess ordinary nonbusiness deductions: Excess nonbusiness capital gains 6,000 Excess ordinary nonbusiness deductions 1,500 Excess nonbusiness capital gains reduced by excess ordinary nonbusiness deductions $ 4,500 Barry can use $4,500 of his nonbusiness capital gains to offset any business capital losses. The remaining $500 of business capital losses must be added back to calculate the net operating loss.



Both the IRS and most commercial tax preparation software have modified the above formula found in Treasury Regulation §1.172-3(c). The alternative calculation arrives at the same answer, but follows a more logical path. STEP 1 – Calculate excess nonbusiness capital gains. Nonbusiness capital gains $ 13,000 Nonbusiness capital losses (7,000) Excess nonbusiness capital gains 6,000 STEP 2 – Combine ordinary nonbusiness income and excess nonbusiness capital gains. Ordinary nonbusiness income 7,500 Excess nonbusiness capital gains 6,000 Step 2 subtotal 13,500 STEP 3 – Subtract ordinary nonbusiness deductions from Step 2 result (but not below zero). Step 2 subtotal 13,500 Ordinary nonbusiness deductions (9,000) Step 3 subtotal 4,500 STEP 4 – Reduce business capital gains by Step 3 result (but not below zero). Business capital gains 5,000 Step 3 subtotal (4,500) Business capital gains not offset by deductions 500

Schedule A ' NOL (see instructions)

1 Enter the amount from your 2011 Form 1040, line 41, or Form 1040NR, line 39. Estates and trusts, entertaxable income increased by the total of the charitable deduction, income distribution deduction, andexemption amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2 Nonbusiness capital losses before limitation. Enter as a positive number . . . . . . . 2

3 Nonbusiness capital gains (without regard to any section 1202 exclusion). . . . . . . 3

4 If line 2 is more than line 3, enter the difference. Otherwise, enter -0-. . . . . . . . . . 4

5 If line 3 is more than line 2, enter the difference.Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

6 Nonbusiness deductions (see instructions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7 Nonbusiness income other than capital gains(see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

8 Add lines 5 and 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

9 If line 6 is more than line 8, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

10 If line 8 is more than line 6, enter the difference.Otherwise, enter -0-. But do not enter more thanline 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

11 Business capital losses before limitation. Enter as a positive number. . . . . . . . . . . 11

12 Business capital gains (without regard to anysection 1202 exclusion). . . . . . . . . . . . . . . . . . . . . . . . . . . 12

13 Add lines 10 and 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

14 Subtract line 13 from line 11. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . 14

15 Add lines 4 and 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

16 Enter the loss, if any, from line 16 of your 2011 Schedule D (Form 1040).(Estates and trusts, enter the loss, if any, from line 15, column (3), of ScheduleD (Form 1041).) Enter as a positive number. If you do not have a loss on thatline (and do not have a section 1202 exclusion), skip lines 16 through 21 andenter on line 22 the amount from line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

FDIA2302L 08/08/11

Form 1045 (2011) Page 2

17 Section 1202 exclusion. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

18 Subtract line 17 from line 16. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . 18

19 Enter the loss, if any, from line 21 of your 2011 Schedule D (Form 1040).(Estates and trusts, enter the loss, if any, from line 16 of Schedule D (Form1041).) Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

20 If line 18 is more than line 19, enter the difference. Otherwise, enter -0-. . . . . . . . 20

21 If line 19 is more than line 18, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

22 Subtract line 20 from line 15. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

23 Domestic production activities deduction from your 2011 Form 1040, line 35, or Form 1040NR, line 34 (orincluded on Form 1041, line 15a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

24 NOL deduction for losses from other years. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

25 NOL. Combine lines 1, 9, 17, and 21 through 24. If the result is less than zero, enter it here and on page 1,line 1a. If the result is zero or more, you do not have an NOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

BAA Form 1045 (2011)

BARRY BERRY 123-45-6789

-80,500.7,000.

13,000.0.

6,000.9,000.

7,500.13,500.

0.

4,500.5,000.

4,500.500.500.

500.

30,000.

-50,000.

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IRC 172(d)(3) No deduction for personal exemptions.

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IRC 172(d)(2) No deduction for capital losses. Business capital losses can be offset

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by excess of nonbusiness capital gains over excess ordinary nonbusiness deductions.

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IRC 172(d)(1) No deduction for net operating loss deduction.

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§172(d)(2)(B) Modification – IRC §1202 Exclusion The exclusion allowed for gain on the sale or exchange of qualified small business stock under IRC §1202 is disregarded and the entire gain must be included in the calculation of a net operating loss. IRC §1202 allows and individual to exclude a percentage of gain on the sale or exchange of qualified small business stock held for more than five years. The exclusion percentage is 50% (60% for empowerment zone business stock); 75% for stock acquired after February 17, 2009 and before September 28, 2010; and 100% for stock acquired after September 27, 2010 and before January 1, 2015. §172(d)(3) Modification – Personal Exemptions To calculate the statutory loss no deduction is allowed for personal exemptions or any amounts allowed in lieu of personal exemptions. §172(d)(4) Modification – Nonbusiness Deductions To calculate the statutory loss nonbusiness deductions are allowed only to the extent of nonbusiness income. This paragraph defines certain items of income and deduction as belonging in either the business or nonbusiness category. There are only three items of income and deductions that are differentiated in this subsection as either business or nonbusiness.

1. Gain or loss from the disposition of any depreciable or real property used in a taxpayer’s trade or business is considered attributable to such business. §172(d)(4)(A).

2. Deductions of casualty or theft losses under IRC §165(c)(2) or (c)(3) are considered as

arising from the taxpayer’s trade or business. IRC §165(c)(2) losses are those losses “incurred in any transaction entered into for profit, though not connected with a trade or business.” IRC §165(c)(3) losses are losses that “arise from fire, storm, shipwreck, or other casualty, or from theft.” §172(d)(4)(C).

3. Deductions for Individual Retirement Accounts (IRC §408) and any deduction allowed

under IRC §404 (Keogh, SEP, SIMPLE IRA) to the extent allocable to a self-employed person are not considered attributable to the individual’s trade or business. §172(d)(4)(D).

Treasury Regulation §1.172-3(a)(3)(i) provides one additional categorization: “Wages and salary constitute income attributable to the taxpayer’s trade or business.”



BUSINESS INCOME NONBUSINESS INCOME Salaries & Wages Dividend income Schedule C Income Interest income Farm Income Pension and annuity income Gain from sale of business assets & §1231 property

Gain from sale of assets not used in trade or business (personal assets, investments)

Rental income Oil & gas royalties Recapture income - §1245, §1250, etc. Investment income Unemployment compensation IRA distributions Tips & bonuses Prizes *S corporation and Partnership Income *S corporation and Partnership Income State & Local income tax refunds (tax on business profits only)

Nonbusiness capital gains in excess of nonbusiness capital losses

Gambling winnings *The characterization as business or nonbusiness for items from flow through entities (S corporations, partnerships, trusts) is determined at the entity level. See Campbell, William E., 813 F.2d 694, 59 AFTR 3d 87-917, 87-1 USTC 9253 (5th Cir. 1987). BUSINESS DEDUCTIONS NONBUSINESS DEDUCTIONS Moving expenses Alimony Loss from the sale of §1244 stock IRA contributions State & local taxes on business profits only Student loan interest Interest & litigation expenses on Federal, State & local income taxes on business income

Contributions to personal retirement plan for self-employed (Keogh, SEP, SIMPLE IRA)

§1231 losses Tuition & fees deduction Self-employed health insurance Archer MSA and HSA accounts Educator expenses (1040, page 1: $250 max) Standard deduction if not itemizing Certain Itemized Deductions: Casualty and theft losses (including personal losses), employee business expenses

Nonbusiness itemized deductions: medical expenses, taxes, interest and charitable contributions

Domestic Production Activities Deduction Early withdrawal penalty on savings accounts Payment by federal employee to buy back sick leave used in earlier year

Form 1045, Schedule A is the IRS form used to calculate a net operating loss. Schedule A follows the Internal Revenue Code & Treasury Regulations. The following page is Form 1045, Schedule A annotated with the IRC sections used in computing the various amounts on the form.

Form 1045 (2014) Page 2

Schedule A—NOL (see instructions)

1

Enter the amount from your 2014 Form 1040, line 41, or Form 1040NR, line 39. Estates and trusts, enter taxable income increased by the total of the charitable deduction, income distributiondeduction, and exemption amount . . . . . . . . . . . . . . . . . . . . . 1

2 Nonbusiness capital losses before limitation. Enter as a positive number 2 3 Nonbusiness capital gains (without regard to any section 1202 exclusion) 3 4 If line 2 is more than line 3, enter the difference. Otherwise, enter -0- . . 4 5 If line 3 is more than line 2, enter the difference.

Otherwise, enter -0- . . . . . . . . . 5 6 Nonbusiness deductions (see instructions) . . . . . . . . . . . 6 7 Nonbusiness income other than capital gains (see

instructions) . . . . . . . . . . . . 7 8 Add lines 5 and 7 . . . . . . . . . . . . . . . . . . . 8 9 If line 6 is more than line 8, enter the difference. Otherwise, enter -0- . . . . . . . . . . 9

10

If line 8 is more than line 6, enter the difference. Otherwise, enter -0-. But do not enter more than line 5 . . . . . . . . . . . . 10

11 Business capital losses before limitation. Enter as a positive number . . 11 12 Business capital gains (without regard to any

section 1202 exclusion) . . . . . . . . 12 13 Add lines 10 and 12 . . . . . . . . . . . . . . . . . . 13 14 Subtract line 13 from line 11. If zero or less, enter -0- . . . . . . . 14 15 Add lines 4 and 14 . . . . . . . . . . . . . . . . . . . 15

16

Enter the loss, if any, from line 16 of your 2014 Schedule D (Form 1040). (Estates and trusts, enter the loss, if any, from line 19, column (3), ofSchedule D (Form 1041).) Enter as a positive number. If you do not have a loss on that line (and do not have a section 1202 exclusion), skip lines 16 through 21 and enter on line 22 the amount from line 15 . . . . . . 16

17 Section 1202 exclusion. Enter as a positive number . . . . . . . . . . . . . . . . 17 18 Subtract line 17 from line 16. If zero or less, enter -0- . . . . . . . 18 19

Enter the loss, if any, from line 21 of your 2014 Schedule D (Form 1040). (Estates and trusts, enter the loss, if any, from line 20 of Schedule D (Form1041).) Enter as a positive number . . . . . . . . . . . . . 19

20 If line 18 is more than line 19, enter the difference. Otherwise, enter -0- . 20 21 If line 19 is more than line 18, enter the difference. Otherwise, enter -0- . . . . . . . . . 21 22 Subtract line 20 from line 15. If zero or less, enter -0- . . . . . . . . . . . . . . . 22 23 Domestic production activities deduction from your 2014 Form 1040, line 35, or Form 1040NR, line

34 (or included on Form 1041, line 15a) . . . . . . . . . . . . . . . . . . . . 23 24 NOL deduction for losses from other years. Enter as a positive number . . . . . . . . . 24 25 NOL. Combine lines 1, 9, 17, and 21 through 24. If the result is less than zero, enter it here and on

page 1, line 1a. If the result is zero or more, you do not have an NOL . . . . . . . . . . 25Form 1045 (2014)


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IRC Section 172(d) illustrated on Form 1045 Schedule A

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AA 172(d)(1) - No deduction for NOLD BB 172(d)(2)(A) - No deduction for capital losses - business CC 172(d)(2)(A) - No deduction for capital losses - nonbusiness DD 172(d)(2)(B) - No deduction for IRC Section 1202 gains EE 172(d)(3) - No deduction for personal exemptions FF 172(d)(4) - No nonbusiness deductions in excess of nonbusiness income GG 172(d)(5) - No deduction for domestic production activities deduction



Example 2 – How Does A Net Operating Loss

Appear On Form 1045, Schedule A? Carl McGallo incurred a loss of $50,000 in his winery business in 2014. During 2014 he also earned interest income of $7,500; sold stock generating capital gains of $13,000 and mutual funds generating capital losses of $7,000. He paid personal residence interest of $19,000. Carl also had a $30,000 net operating loss deduction carried forward from 2013. Below is a recap of Carl’s 2014 income tax return. How much is Carl’s 2014 net operating loss? Interest Income $ 7,500 Winery Loss (50,000) Nonbusiness capital gain $ 13,000 Nonbusiness capital loss (7,000) Net nonbusiness capital gain 6,000 6,000 Net Operating Loss Deduction (30,000) Personal Residence Interest (19,000) Taxable Income before Exemption (85,500) Exemption (3,950) Taxable Income $ (89,450) Modifications: §172(d)(1) – Net operating loss deduction from prior year of $30,000. Schedule A Line 24. §172(d)(3) – Personal Exemption of $3,950. Schedule A Line 1 §172(d)(4) – Nonbusiness deductions of $19,000 limited to nonbusiness income of $7,500 + $6,000 nonbusiness capital gain. $19,000 – (7,500 + 6,000) = $5,500. Schedule A Line 9.

Form 1045 (2014) Page 2


1 Enter the amount from your 2014 Form 1040, line 41, or Form 1040NR, line 39. Estates and trusts, entertaxable income increased by the total of the charitable deduction, income distribution deduction, and

1exemption amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2Nonbusiness capital losses before limitation. Enter as a positive number . . . . . . 2

3 3Nonbusiness capital gains (without regard to any section 1202 exclusion). . . . . .

4 4If line 2 is more than line 3, enter the difference. Otherwise, enter -0-. . . . . . . . .

If line 3 is more than line 2, enter the difference.55Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6Nonbusiness deductions (see instructions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7 Nonbusiness income other than capital gains7(see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8 8Add lines 5 and 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 9If line 6 is more than line 8, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

If line 8 is more than line 6, enter the difference.10Otherwise, enter -0-. But do not enter more than

10line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11Business capital losses before limitation. Enter as a positive number. . . . . . . . . . 11

Business capital gains (without regard to any1212section 1202 exclusion). . . . . . . . . . . . . . . . . . . . . . . . . .

13 13Add lines 10 and 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14 14Subtract line 13 from line 11. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . .

15 15Add lines 4 and 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16 Enter the loss, if any, from line 16 of your 2014 Schedule D (Form 1040).(Estates and trusts, enter the loss, if any, from line 19, column (3), of ScheduleD (Form 1041).) Enter as a positive number. If you do not have a loss on thatline (and do not have a section 1202 exclusion), skip lines 16 through 21 and

16enter on line 22 the amount from line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17Section 1202 exclusion. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Enter the loss, if any, from line 21 of your 2014 Schedule D (Form 1040).19(Estates and trusts, enter the loss, if any, from line 20 of Schedule D (Form

191041).) Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 20If line 18 is more than line 19, enter the difference. Otherwise, enter -0-. . . . . . .

21 21If line 19 is more than line 18, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2222 Subtract line 20 from line 15. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23 Domestic production activities deduction from your 2014 Form 1040, line 35, or Form 1040NR, line 34 (or23included on Form 1041, line 15a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24 24NOL deduction for losses from other years. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25 NOL. Combine lines 1, 9, 17, and 21 through 24. If the result is less than zero, enter it here and on page 1,25line 1a. If the result is zero or more, you do not have an NOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BAA Form 1045 (2014)

FDIA2302L 07/24/14

CARL MCGALLO 222-22-2222

-85,500.7,000.

13,000.0.

6,000.19,000.

7,500.13,500.

5,500.

0.

0.

30,000.

-50,000.




INDIVIDUAL NOL QUICK WORKSHEET

(No business capital gains or losses) a. Taxable Income before Exemptions $(_______)

Modifications:

b. Net Operating Loss Deduction $_______

c. Capital Losses * _______

d. IRC §1202 exclusion _______

Excess Nonbusiness Deductions

e. Nonbusiness Deductions $_______

f. Nonbusiness Income (_______)

g. Excess Nonbusiness Deductions (e-f) _______

h. DPAD _______

i. Total Modifications (b+c+d+g+h) ________

j. Net Operating Loss (a + i) $________

* Separate business and nonbusiness capital gains and losses. Business capital losses can only be offset by excess of sum of (1) nonbusiness capital gains and (2) nonbusiness ordinary income over nonbusiness deductions. See example earlier for a detailed example of how business capital losses impact the calculation of a net operating loss.

Computing NOLs for corporate taxpayers The NOL of a corporate taxpayer is calculated by taking the excess of deductions over gross

income, with some adjustments. (IRC §172(a)–(c)) The adjustments are:

• A dividends received deduction is allowed in full if claiming the deduction results in a loss. A corporation owning less than 20% of the distributing corporation may deduct 70% of the dividends received or accrued. The deduction is increased to 80% for a corporation owning at least 80% of the distributing corporation;

• A deduction for dividends paid on certain preferred stock of public utilities is allowed in full without regard to the limitations under IRC §247;



• The IRC §244 dividends received deduction for preferred stock of public utilities is allowed in full (without the limitation for taxable income) if claiming the deduction results in a loss;

• An NOL resulting from losses in other taxable years may not be deducted; and • The manufacturer’s deduction for domestic production activities under IRC §199 is not

deductible for NOL purposes.

Example of corporate NOL calculation XYZ corporation has $300,000 of income from manufacturing, $400,000 of

expenses, and $100,000 of dividend income.

XYZ owns less than 20% of the company distributing the dividends, so the dividends received deduction is limited to 70%.

It has a net operating loss computed as follows:

Manufacturing income $300,000 Dividend income 100,000

400,000 Less: Expenses (400,000) Tentative taxable income 0 Less: 70% dividends received deduction ( 70,000) Net operating loss $ 70,000



PART II – DETERMINE THE CARRYBACK AND CARRYOVER PERIODS FOR A NET OPERATING LOSS

STANDARD CARRYBACK PERIOD The carryback and carryover periods for a net operating loss are governed under IRC §172(b)(1).

172(b)(1)(A)General rule.— Except as otherwise provided in this paragraph, a net operating loss for any taxable year:

172(b)(1)(A)(i) shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and 172(b)(1)(A)(ii) shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.

A net operating loss is first carried back two (2) years and then forward twenty (20) years. For a net operating loss incurred in 2014 the first carryback year is 2012. A net operating loss that is not fully absorbed in the carryback or intervening year(s) will be carried forward twenty (20) years past the loss year. For a net operating loss incurred in 2014 the carryover period is 2015 through 2034. Any portion of a net operating loss not absorbed by the year 2034 will expire and is lost forever.

Example 3 – Net Operating Loss Carryback and Carryover

Sarah started a new business in 2014 making chewing gum from fish flavors: Juicy Jellyfish, Blowfish Bubble, Sweet Salmon and Luscious Lungfish were her favorites. Sarah’s business did not do well its first year and she generated a net operating loss of $50,000 on her 2014 tax return. Sarah does not live in a federally declared disaster area. Q: In what years will Sarah be able to utilize her 2014 net operating loss? A: Sarah can carryback her net operating loss to 2012. If her loss is not fully absorbed in 2012 Sarah will carry the remaining portion of her loss to 2013. If her loss is still not fully absorbed after carrying back to both 2012 and 2013, Sarah will carry her loss forward to 2015 and subsequent years for the next 20 years. If Sarah’s loss is not fully absorbed by 2034 (20 years after the original loss year) it will expire.



Periods of less than twelve (12) months. Any taxable period that contains less than 12 months is considered to be a full taxable year for purposes of determining the number of years a net operating loss is carried to under IRC §172(b)(1). Treasury Regulation §1.172-4(a)(2). A short taxable year in the year of a taxpayer’s birth or death is considered a full taxable year for purposes of determining the carryback or carryover years. Other Carryback Periods Taxpayer Relief Act of 1997 changed the carryback period from three (3) years to two (2) years and the carryover period from fifteen (15) years to twenty (20) years. This change to the carryback and carryover periods was effective for tax years beginning after August 5, 1997. Three-Year Carryback A 3-year carryback period is required in certain cases. IRC §172(b)(1)(F) requires a taxpayer to carry a net operating loss back three years rather than two years required under IRC §172(b)(1)(A). There are three categories of individuals that are required to use the 3-year carryback.

1. Individuals with losses arising from fire, storm, shipwreck, or other casualty, or from theft,

2. Small businesses with net operating losses attributable to federally declared disasters. The term “federally declared disaster” means and disaster that the President of the United States has determined to warrant assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A list of presidentially declared disasters is available on the IRS website at http://www.irs.gov/newsroom/article/0,,id=98936,00.html. The list is organized by state.

3. For taxpayers engaged in the trade or business of farming (defined below), net operating losses attributable to federally declared disasters.

For purposes of #2 above, a small business is a sole proprietorship or partnership whose average annual gross receipts were $5 million or less in the three-year period ending with the year of the net operating loss. Five-Year Carryback Qualified disaster losses. The carryback period for a qualified disaster loss is five years. Qualified disaster losses are only available for federally declared disasters occurring before January 1, 2010. Such losses are limited to the amounts allowed as casualty losses under IRC §165 plus the deductions allowed for qualified disaster expenses under IRC §198A. The losses must be attributable to a federally declared disaster and cannot otherwise exceed the regular net operating loss.

http://www.irs.gov/newsroom/article/0,,id=98936,00.html



Farming losses. Net operating losses incurred the farming business have a carryback period of five (5) years. Farming losses are defined as the lesser of:

a) the net operating loss determined using only income and deductions attributable to the farming business, or

b) the net operating loss. A net operating loss from a farming business cannot be greater than the regular net operating loss. Farming losses subject to the 5-year carryback do not include any qualified disaster losses discussed above. Farming Business Defined For purposes of determining a farming loss only those losses from a “farming business” are taken into account. A “farming business” includes the trade or business of operating a nursery or sod farm, or the trade or business of the raising or harvesting of trees bearing fruit, nuts or other crops, or ornamental trees. Also included in the definition of “farming business” are the raising, shearing, feeding, caring for, training, and management of animals. However, a “farming business” does not include contract harvesting of crops grown or raised by others, or the purchase and resale of plants or animals raised by someone other than the taxpayer. Ten-Year Carryback Specified liability losses are subject to a ten-year carryback period. IRC §172(b)(1)(C). Specified liability losses are losses arising from product liability or expenses “incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability.” IRC §172(f)(1)(A)(ii). Specified liability losses also include certain losses for acts that occurred more than three years before the loss year and resulted in a liability under any federal or state law requiring:

• Reclamation of land, • Decommissioning of a nuclear power plant, • Dismantling of a drilling platform, • Remediation of environmental contamination, or • Payment under any workers compensation act.

Earliest Year A net operating loss must be carried back to the earliest year available under IRC §172(b)(1). A taxpayer cannot choose which year to carry back a loss unless specifically provided for in the statute. However, a taxpayer can choose to waive the carryback period.



WAIVING THE CARRYBACK PERIOD Taxpayers may elect to waive the carryback. Any taxpayer may relinquish the entire carryback period with a timely election. Once made, the election is irrevocable for that year. IRC §172(b)(3). Elections to waive carryback period must be timely. An election to waive the carryback period, or multiple carryback periods, must be made by the due date of the tax return (including extensions). If a taxpayer files their original tax return by the unextended due date and later decides that they want to waive the carryback period, there is a brief window of opportunity available to secure the election. For timely filed returns without extensions, an amended return can be filed electing to waive the carryback period. The amended return must be filed within six (6) months of the due date of the original return (excluding extensions). At the top of the statement electing to waive the carryback period, enter the phrase “Filed pursuant to section 301.9100-2.” Multiple carryback periods available. If a taxpayer is eligible for more than one carryback period, separate elections to waive each carryback period are required. For example, if a taxpayer is eligible to carry back a net operating loss 5 years due to a qualified disaster loss, both an election not to claim the 5-year carryback and an election not to claim the regular 2-year carryback must be made. Merely carrying a loss back two years is not an effective election to waive the 5-year carryback period. Relinquishing the carryback period does not extend the carryover period. Both the carryback period and the carryover period are absolute. Relinquishing any number of years in a carryback period does not add that number of years to the carryover period. Regular Tax & Alternative Minimum Tax Net Operating Losses. Waiving a carryback period is effective for both regular income tax and alternative minimum tax. Separate waivers are not permissible. Rev. Rul. 87-44, 1987-1 CB 3. Multiple taxpayers have attempted to make elections to waive the carryback of their regular tax net operating loss but not their alternative tax net operating loss. Miller v. Commissioner, 96-2 USTC ¶50,614, 99 F3d 1042 (CA-11, 1996); Plumb v. Commissioner 97 T.C. 632 (1991). Failure to make election. When an election to waive a carryback period is not made, the net operating loss must be carried back. If the statute of limitations for making the carryback has expired, the net operating loss carryover must still be adjusted as if it had been carried back. See “How is the NOL Carried Back” later.



SAMPLE ELECTION STATEMENTS Election to waive net operating loss carryback “Pursuant to IRC Section 172(b)(3), the taxpayer hereby elects to relinquish the entire carryback period with respect to the net operating loss incurred for the tax year ended December 31, 20XX.” Election to waive the 5-year carryback (Farming Losses) “Pursuant to IRC Section 172(i)(3), the taxpayer hereby elects to have the carryback period determined without regard to subsection 172(b)(1)(G) with respect to the farming loss incurred for the tax year ended December 31, 20XX.” Election to waive the 5-year carryback (Qualified Disasters) “Pursuant to IRC Section 172(j)(3), the taxpayer hereby elects to treat any qualified disaster losses incurred for the tax year ended December 31, 20XX without regard to the 5-year carryback rule under IRC Section 172(b)(1)(J).” Election to waive the 10-year carryback (Specified Liability Loss) “Pursuant to IRC Section 172(f)(6), the taxpayer hereby elects to have the carryback period determined without regard to subsection 172(b)(1)(C) with respect to the specified liability loss for the tax year ended December 31, 20XX.” Corporations

Corporations make the election by checking Box 11 on Schedule K of Form 1120.

Practical Consideration The statute of limitations for assessments on any year to which a net operating loss is carried back is extended to the statute of limitations for assessment date of the loss year. Consider any aggressive tax positions taken on the tax return to which a loss will be carried. When a net operating loss is carried back to a prior year the IRS may examine the loss year to determine the accuracy of the NOL, and if the IRS deems it necessary, examine the year to which the loss is being carried. The amount of additional tax that the IRS can assert in years otherwise barred by statute is limited to the amount of the refund claim.



Corporations: Deducting an “expected” NOL on the current-year return IRC §6164 allows a corporation that anticipates an expected carryback refund to file Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. By doing so, the corporation extends the time for payment of tax for the immediately preceding tax year. Only payments of tax that are required to be paid after the filing of Form 1138 are eligible for extension.

Form 1138 requires the following information:

• Ending date of the tax year of the expected NOL;

• Amount of the expected NOL;

• Reduction of previously determined tax attributable to the expected NOL carryback (the postponable amount of tax);

• Ending date of the tax year immediately preceding the tax year of the expected NOL carryback;

• Reasons, facts, and circumstances that cause the corporation to expect an NOL; and

• Amount for which payment is to be extended, not to exceed the amount the amount of reduction (see third bullet, above).

IRC §6164(c) explains the amount for which payment is to be extended as the total tax shown on the tax return:

• Increased by any amount assessed as a deficiency prior to the date of filing the statement (Form 1138); and

• Decreased by any amount paid or required to be paid prior to the date of the filing. It should be noted that only tax payments that are required to be paid after Form 1138 is filed are eligible for extension. The form should not be filed if all the required payments have been paid or were required to have been paid.

Filing Form 1138 entitles a corporation to reduce the unpaid tax for its preceding year by the postponable amount of tax reported on the form. Although there is a two-year carryback period for NOLs, the provision allows relief only in the preceding year, since all taxes for the second preceding year should have already been paid.

The Form 1138 is to be filed after the start of the tax year of the expected NOL, but before the tax of the preceding tax year is required to be paid. It can be filed separately, but is often filed along with the corporate extension application, Form 7004.

If a corporation previously filed a Form 1138 and later finds information that will change the amount of the expected NOL, a revised form should be filed. While the extension is usually automatic, the IRS can terminate it if it believes it contains erroneous or unreasonable information, or if it believes it may not be able to collect the tax.



Example of Form 1138 Sunny Day Inc. is a calendar year C corporation and has taxable income in 2015 of $100,000

resulting in a tax liability of $22,250.

It has an expected 2016 NOL of $75,000. At the same time it filed Form 1138, it stated that it expected to have a net operating loss of $75,000 in 2016. Sunny estimates that, after carrying the loss to 2014 (a year in which its taxable income was zero — therefore, none of the NOL is utilized in 2014), the reduction in the tax previously determined for 2015 attributable to the expected NOL carryback would be $18,500.

Sunny accordingly extended the time for payment of $18,500 of its income tax for 2015, and paid $3,750 of such tax on March 15, 2016. (Treas. Regs. §1.6164-4)

Note: This result is the same as if Sunny had paid $22,250 with its 2015 tax return, then filed an NOL carryback to 2015 from 2016; i.e., the NOL carryback would have reduced its 2015 taxable income to $25,000, resulting in a tax of $3,750.

Time for filing Form 1138 Form 1138 must be filed after the start of the tax year of the expected NOL but before the tax liability for the preceding year must be paid (generally March 15 for calendar-year corporations, but that due date is changing to April 15 beginning in 2017). The extension for paying the preceding year’s tax runs to the end of the month in which the return for the year of the expected NOL is required to be filed (including extensions).

Filing subsequent Forms 1138 If the corporation previously filed Form 1138 and later finds information that changes the amount of the expected NOL, the corporation can file a revised Form 1138. If the amount of the NOL is increased based on the new information, the corporation can postpone the payment of a larger amount of tax as long as the larger amount has not been paid or is not yet required to be paid. If the amount of the NOL is reduced because of the new information, the corporation must pay the tax to the extent that the amount of tax postponed on the original filing exceeds the amount of tax postponed on the revised filing.

How to file Form 1138 is not attached to Form 1120. It can be filed separately or with extension Form 7004. If Form 1138 and Form 7004 are filed together, Form 1138 will reduce or eliminate the amount of tax to be deposited when Form 7004 is filed.

If Form 1138 is filed separately, file it with the IRS center where the corporation files its income tax return. If filed with Form 7004, file it with the IRS center where the corporation files its Form 7004.



CARRYOVER PERIOD The carryover period for a net operating loss is governed by IRC §172(b)(1)(A)(ii). The carryover period is 20 years. The most recent change to the carryover period was in the Taxpayer Relief Act of 1997. The 1997 Act changed the carryover period from fifteen (15) years to twenty (20) years. This change to carryover periods was effective for tax years beginning after August 5, 1997. For calendar year taxpayers, the last year that the 15-year carryover rule applied to was 1997. Net operating losses generated in 1997 expired after 2012.

PART III – COMPUTE THE NET OPERATING LOSS ABSORPTION IN A CARRYBACK YEAR AND INTERVENING YEARS

Net Operating Loss Deduction (NOLD) A net operating loss carried back to an earlier year is called a net operating loss deduction (NOLD). The net operating loss deduction is specifically allowed by IRC §172(a). Law Applicable to Computations IRC §172(e) “In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.” When making calculations required by the carryback of a net operating loss, the law of the year to which the loss is being carried is controlling. Treasury Regulation §1.172-1(e) further specifies that a net operating loss is determined under the law applicable to the year in which the loss is generated, without regard to the law applicable to the year to which the net operating loss will be carried.



Adjustments Several above-the-line items calculated based upon AGI may be impacted by the net operating loss deduction:

• Special allowance for rental real estate passive activity losses • Social security benefits / tier 1 railroad retirement benefits • IRA deductions • Excludable savings bond interest • Excludable employer-provided adoption benefits • Student loan interest • Tuition deduction

Itemized deductions may also be impacted if they were limited based upon a percentage of AGI:

• Medical expenses • Mortgage insurance premiums • Casualty & theft losses • Miscellaneous itemized deductions. • Note: The deduction for charitable contributions cannot be decreased because of an NOL

carryback. IRC §170(b)(1)(G).

Example 4 – NOLD Impact on Charitable Contribution Carryover

Lynne has a net operating loss of $100,000 in 2014. She carries the loss back to 2012 where she had AGI of $150,000 and charitable contributions of $80,000 subject to the 50% limitation. On her original 2012 tax return Lynne used $75,000 of her charitable contributions and had a $5,000 carryover to 2013. 2012 Charitable contributions $ 80,000 50% limitation ($150,000 X 50%) (75,000) Charitable contributions Carryover to 2013 $ 5,000 Modified Taxable Income 2012 AGI before NOLD $150,000 Charitable contributions (75,000) NOL absorbed in 2012 $ 75,000 Lynne will carry forward to 2013 her unused net operating loss of 25,000 ($100,000 – 75,000). Her charitable contribution carryover to 2013 remains unchanged at $5,000.



Phase-outs in the carryback year may be impacted when the net operating loss deduction is taken into consideration:

• Pease limitation on overall itemized deductions • Phase-out of personal Exemptions

Credits in the carryback year may be impacted by the net operating loss deduction:

• Education credits • Retirement Saver’s credit • First-time homebuyer credit • Child and dependent care credit • Credit for the elderly and disabled

Note: Credits that carryover to prior and succeeding years may be impacted by a change in tax liability. In cases where credits are freed up, taxpayers may be required to file amended tax returns for years other than the carryback year. Credits affected by the decrease in tax liability include the foreign tax credit, general business credit and alternative minimum tax credit. The amount of the net operating loss carryback and carryover is determined under IRC §172(b)(2).

172(b)(2)Amount of carrybacks and carryovers.— The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be computed:

172(b)(2)(A) with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and 172(b)(2)(B) by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,

and the taxable income so computed shall not be considered to be less than zero.



FULLY ABSORBED If the net operating loss deduction is less than or equal to the taxable income to the year in which it is carried, the NOLD is considered fully absorbed. When an NOLD is fully absorbed it is not necessary to calculate modified taxable income. The NOLD will be subtracted from adjusted gross income, any items with limitations based upon AGI will be recalculated, tax will be recomputed and no carryover will be available for subsequent years.

Example 5 – Fully Absorbed Net Operating Loss Deduction

Sophie incurred a net operating loss of $10,000 in 2014. Sophie’s 2012 taxable income was $25,000. Because her 2012 taxable income is greater than the net operating loss deduction, the loss is fully absorbed. Sophie will not have any carryover of her net operating loss to subsequent years. NOT FULLY ABSORBED If the net operating loss deduction is greater than the taxable income for the carryback year it is necessary to determine how much of the net operating loss is absorbed in the carryback year and how much will be carried forward to the next year. Years between the earliest year the net operating loss is carried and the loss year are called “intervening years.” Determining how much of a net operating loss is absorbed requires that modifications be made to the taxable income of the carryback year. Once the modifications have been made, the taxable income is termed, “modified taxable income.” Some IRS publications and commercial tax services refer to modified taxable income as “recomputed” or “refigured.” Modified taxable income is subtracted from the net operating loss deduction to arrive at the NOL carryover to the succeeding year. Modified Taxable Income Modified taxable income is calculated in the same manner as taxable income is normally calculated except that certain otherwise allowable deductions must be modified. The modifications required to taxable income are specified in IRC §172(b)(2). This Code section mandates that a net operating loss be carried to the earliest year under subsection (b)(1) and describes the amount to be carried to other years as follows:

Net operating loss deduction – Modified taxable income = Net operating loss carryover



The modifications required to taxable income are those found in §172(d), but ignoring (d)(1), (d)(4) and (d)(5). Additionally, the net operating loss for the loss year is not considered. Hence, the modifications required to taxable income are: 172(d)(2) – Capital losses not allowed, §1202 exclusion not allowed 172(d)(3) – No deduction for personal exemptions 172(d)(6) – REITs (not applicable to individuals) 172(d)(7) – Manufacturing deduction (Domestic Production Activities Deduction)

For the purpose of determining modified taxable income for this section it is NOT necessary to distinguish between business capital gains & losses and nonbusiness capital gains & losses. Self-employment tax is not affected by a net operating loss deduction. The modifications to taxable income in a carryback year are made solely to determine how much of a net operating loss deduction is absorbed and the resulting carryover amount, if any. Caution! Modifications to carryback years do not affect passive activity loss carryovers!



Example 6 – Net Operating Loss Carryback & Carryover

Carl McGallo incurred a net operating loss of $50,000 in 2014 (See Example 2). Carl did not elect to waive the carryback period. His net operating loss is carried back first to 2012. If the loss is not fully absorbed in 2012 it will be carried forward to 2013. Any loss remaining after 2013 will be carried forward to 2015. Carl had the following income, deductions, tax and withholding in 2012 and 2013: 2012 2013 Wages $ 50,000 $ 60,000 Capital loss (1,000) (2,000) Partnership Income 5,000 -0- DPAD 1,800 -0- Adjusted Gross Income 52,200 58,000 Itemized Deductions: Medical ($5,000 each year before limitation) 1,085 -0- Taxes 4,000 5,000 Personal Residence Interest 15,000 15,000 Charitable Contributions 6,000 6,000 Tax Preparation Fee ($2,000 before limitation) 956 840 Total Itemized Deductions 27,041 26,840 Exemption 3,800 3,900 Taxable Income 21,359 27,260 Tax 2,771 3,645 Withholding 10,000 10,000 Calculate Carl’s refund by carrying back his net operating loss. First, determine whether the net operating loss is fully absorbed in the earliest carryback year. Carl’s taxable income in 2012 was $21,359. His net operating loss deduction is greater than his taxable income. His net operating loss will not be fully absorbed in 2012. Because the net operating loss will not be fully absorbed, it is necessary to calculate modified taxable income in order to determine the amount of the net operating loss absorbed and the amount of the carryover to the succeeding year.



Example 6 - Continued Second, if Carl has a net capital loss, a §1202 exclusion or a DPAD deduction, then recompute the 2012 adjusted gross income with the modifications required by IRC §172(b). Adjusted Gross Income $ 52,200 Capital loss 1,000 DPAD 1,800 Recomputed adjusted gross income 55,000 Refigure the itemized deductions using the recomputed adjusted gross income. Gross medical expenses $ 5,000 Limitation ($55,000 x 7.5%) (4,125) Refigured medical expenses (not less than $0) 875 Allowable medical expenses on original return 1,085 Refigured medical expenses (not less than $0) (875) Medical Expense Adjustment 210 Gross miscellaneous itemized deductions $ 2,000 Limitation ($55,000 X 2%) (1,100) Refigured miscellaneous itemized deductions 900 Allowable misc. deductions on original return 956 Refigured miscellaneous itemized deductions 900 Miscellaneous Deductions Adjustment 56 Calculate modified taxable income: 2012 taxable income before NOLD $ 21,359 Add capital loss 1,000 Add DPAD 1,800 Add itemized deduction adjustments 266 Add personal exemptions 3,800 Modified Taxable Income 28,225 Calculate NOLD carryover to succeeding year: Net operating loss deduction $ 50,000 Less Modified Taxable Income (28,225) NOLD carryover to 2013 21,775



Example 6 – Continued Now that Carl’s net operating loss deduction carryover to 2013 has been calculated, repeat the first step – determine whether the net operating loss is fully absorbed. Carl’s taxable income in 2013 was $27,260. His 2013 taxable income is greater than the net operating loss deduction. The net operating loss deduction is fully absorbed in 2013. Because the net operating loss is fully absorbed in 2013 it will not be necessary to calculate modified taxable income. The net operating loss deduction will be subtracted from adjusted gross income, any items with limitations based upon AGI will be recalculated, and tax will be recomputed. 2013 Adjusted Gross Income $ 58,000 Net operating loss deduction carryover (21,775) 2013 AGI after NOLD 36,225 36,225 Itemized deductions: Medical [$5,000 – (36,225 X 10%)] 1,377 Taxes 5,000 Personal Residence Interest 15,000 Charitable Contributions 6,000 Miscellaneous [$2,000 – (36,225 X 2%) $ 1,275 Total Itemized Deductions 28,652 (28,652) Personal Exemption (3,900) 2013 Taxable income after NOLD $ 3,673 Tax calculation and refunds are shown on accompanying Form 1045, page 1.

Application for Tentative Refund OMB No. 1545-0098

Form 1045 G Separate instructions and additional information are available at irs.gov/form1045.G Do not attach to your income tax return. Mail in a separate envelope.Department of the Treasury 2014G For use by individuals, estates, or trusts.Internal Revenue Service

Name(s) shown on return Social security or employer identification number

TY P Number, street, and apartment or suite number. if a P.O. box, see instructions. Spouse's social security number (SSN)P RE I

N City, town or post office, state, and ZIP code. If a foreign address, also complete spaces below (see instructions). Daytime phone numberO TR

Foreign country name Foreign province/county Foreign postal code

Net operating loss (NOL) (Schedule A, line 25, page 2) Unused general business credit Net section 1256 contracts lossa b c1 This application is filed$ $ $to carry back:

2 a For the calendar year 2014, or other tax year Date tax return was filedbbeginning , 2014, and ending ,

3 If this application is for an unused credit created by another carryback, enter year of first carryback G

If you filed a joint return (or separate return) for some, but not all, of the tax years involved in figuring the carryback, list the years and4

specify whether joint (J) or separate (S) return for each G

and b5 If SSN for carryback year is different from above, enter Year(s) Ga SSN GIf you changed your accounting period, give date permission to change was granted G6

Have you filed a petition in Tax Court for the year(s) to which the carryback is to be applied?. . . . . . . . . . . . . . . . . . . . . . . . 7 Yes No8 Is any part of the decrease in tax due to a loss or credit resulting from a reportable transaction required to be

Yes Nodisclosed on Form 8886, Reportable Transaction Disclosure Statement?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 If you are carrying back an NOL or net section 1256 contracts loss, did this cause the release of foreign tax credits orYes Nothe release of other credits due to the release of the foreign tax credit (see instructions)? . . . . . . . . . . . . . . . . . . . . . . . . . . .

Computation of Decrease preceding preceding precedingin Tax (see instructions) tax year ended G tax year ended G tax year ended GNote: If 1a and 1c are blank, skip

Before carryback After carryback Before carryback After carryback Before carryback After carrybacklines 10 through 15.

10 NOL deduction after carry-back (see instructions). . . . .

Adjusted gross income. . . . . 11

Deductions (see instrs). . . . . 12

13 Subtract ln 12 from ln 11. . .

Exemptions (see instrs) . . . . 14Taxable income. Line 1315minus line 14. . . . . . . . . . . .

Income tax. See instructions16and attach an explanation. . .

Alternative minimum tax. . . . 17

18 Add lines 16 and 17. . . . . . .

19 General business credit(see instructions). . . . . . . . .

20 Other credits.Identify . . . . . . . . . . . . . . . .

Total credits. Add lines 1921and 20. . . . . . . . . . . . . . . . .

Subtract ln 21 from ln 18. . . 22

Self-employment tax. . . . . . . 23

Other taxes . . . . . . . . . . . . . 24Total tax. Add lines 2225through 24. . . . . . . . . . . . . . Enter the amount from the26'After carryback' column online 25 for each year. . . . . . .

27 Decrease in tax. Line 25minus line 26. . . . . . . . . . . .

28 Overpayment of tax due to a claim of right adjustment under section 1341(b)(1) (attach computation) . . . . . . . . . . . . . . . .

Under penalties of perjury, I declare that I have examined this application and accompanying schedules and statements, and to the best of my knowledge and belief,they are true, correct, and complete.Sign

Your signature DateHere AKeep a copy of

Spouse's signature. If Form 1045 is filed jointly, both must sign Datethis applicationfor your records. A

Print/Type preparer's name Preparer's signature Date PTINCheck if

Paid self-employed

Preparer GFirm's name Firm's EIN GUse Only

Firm's address GPhone no.

FDIA2301L 07/24/14 Form 1045 (2014)BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see instructions.


123 MAIN STREET

PASO ROBLES, CA 93446

50,000.

4/15/15

X

X

X

2ND 1ST12/31/12 12/31/13

50,000. 21,775.52,200. 2,200. 58,000. 36,225.27,041. 31,654. 26,840. 28,652.25,159. -29,454. 31,160. 7,573.3,800. 3,800. 3,900. 3,900.

21,359. -33,254. 27,260. 3,673.

2,771. 3,645. 378.

2,771. 3,645. 378.

2,771. 3,645. 378.

2,771. 3,645. 378.

378.

2,771. 3,267.

P00235432SEID & COMPANY, CPAS 20-0465090935 RIVERSIDE AVENUE, SUITE 1PASO ROBLES, CA 93446 (805) 237-1040

MARK F. SEID

SEE STMT 1


Form 1045 (2014) Page 2


1 Enter the amount from your 2014 Form 1040, line 41, or Form 1040NR, line 39. Estates and trusts, entertaxable income increased by the total of the charitable deduction, income distribution deduction, and

1exemption amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2Nonbusiness capital losses before limitation. Enter as a positive number . . . . . . 2

3 3Nonbusiness capital gains (without regard to any section 1202 exclusion). . . . . .

4 4If line 2 is more than line 3, enter the difference. Otherwise, enter -0-. . . . . . . . .

If line 3 is more than line 2, enter the difference.55Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6Nonbusiness deductions (see instructions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7 Nonbusiness income other than capital gains7(see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8 8Add lines 5 and 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 9If line 6 is more than line 8, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

If line 8 is more than line 6, enter the difference.10Otherwise, enter -0-. But do not enter more than

10line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11Business capital losses before limitation. Enter as a positive number. . . . . . . . . . 11

Business capital gains (without regard to any1212section 1202 exclusion). . . . . . . . . . . . . . . . . . . . . . . . . .

13 13Add lines 10 and 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


15 15Add lines 4 and 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16 Enter the loss, if any, from line 16 of your 2014 Schedule D (Form 1040).(Estates and trusts, enter the loss, if any, from line 19, column (3), of ScheduleD (Form 1041).) Enter as a positive number. If you do not have a loss on thatline (and do not have a section 1202 exclusion), skip lines 16 through 21 and

16enter on line 22 the amount from line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17Section 1202 exclusion. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Enter the loss, if any, from line 21 of your 2014 Schedule D (Form 1040).19(Estates and trusts, enter the loss, if any, from line 20 of Schedule D (Form

191041).) Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 20If line 18 is more than line 19, enter the difference. Otherwise, enter -0-. . . . . . .

21 21If line 19 is more than line 18, enter the difference. Otherwise, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2222 Subtract line 20 from line 15. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23 Domestic production activities deduction from your 2014 Form 1040, line 35, or Form 1040NR, line 34 (or23included on Form 1041, line 15a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24 24NOL deduction for losses from other years. Enter as a positive number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25 NOL. Combine lines 1, 9, 17, and 21 through 24. If the result is less than zero, enter it here and on page 1,25line 1a. If the result is zero or more, you do not have an NOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BAA Form 1045 (2014)

FDIA2302L 07/24/14


-85,500.7,000.

13,000.0.

6,000.19,000.

7,500.13,500.

5,500.

0.

0.

30,000.

-50,000.


Form 1045 (2014)

Schedule B ' NOL Carryover (see instructions)

Complete one column before going preceding preceding precedingto the next column. Start with the

tax year ended Gtax year ended G tax year ended Gearliest carryback year.

1 NOL dedn (see instrs).Enter as a positive no. . . . .

2 Taxable inc before 2014NOL carryback (see instrs).Estates & trusts, increasethis amount by the sum ofthe charitable deduction &inc distribution deduction. .

Net capital loss deduction3(see instructions). . . . . . . .

Section 1202 exclusion.4Enter as a positive no. . . . .

Domestic production5activities deduction. . . . . . .

Adjustment to adjusted6gross income (see instrs). .

7 Adjustment to itemizeddeductions (see instrs). . . .

Indivs, enter deduction for8exemptions (minus any amton Form 8914, ln 6, for 2006and 2009; ln 2, for 2005 and2008). Estates and trusts,enter exemption amount. . .

Modified taxable income.9Combine lines 2 through 8.If zero or less, enter -0-. . .

NOL carryover10(see instructions). . . . . . . .

Adjustment toItemized Deductions(Individuals Only)Complete lines 11 - 38 forthe carryback year(s) forwhich you itemized deduc-tions only if line 3, 4, or 5above is more than zero.

Adjusted gross11income before 2014NOL carryback. . . . . . . . . .

Add lines 3 through126 above. . . . . . . . . . . . . . .

Modified AGI. Add lines 1113and 12. . . . . . . . . . . . . . . .

Medical expenses14from Schedule A (Form1040), line 4 (or aspreviously adjusted). . . . . .

Medical expenses from Sch15A (Form 1040), line 1 (or aspreviously adjusted). . . . . .

16 Multiply line 13 by percen-tage from Sch A (Form1040), line 3. . . . . . . . . . . .

Subtract ln 16 from ln 15. If17zero or less, enter -0-. . . . .

Subtract line 17 from18line 14. . . . . . . . . . . . . . . .

19 Mortgage insurancepremiums from Schedule A(Form 1040), ln 13 (or aspreviously adjusted). . . . . .

20 Refigured mtg insurancepremiums (see instrs) . . . .

21 Subtract ln 20 from ln 19. .

FDIA2334L 09/09/14 Form 1045 (2014)BAA


2ND 1ST12/31/12 12/31/13

50,000. 21,775.

21,359. 27,040.

1,000.

1,800.

266.

3,800.

28,225. 27,040. 0.

21,775. 0. 0.

52,200.

2,800.

55,000.

1,085.

5,000.

4,125.

875. 0. 0.

210.


Form 1045 (2014) Page 4

Schedule B ' NOL Carryover (Continued)Complete one column before going preceding preceding precedingto the next column. Start with the

G G Gtax year ended tax year ended tax year endedearliest carryback year.

22 Modified AGI from line 13on page 3 of the form. . . . .

Enter as a positive number23any NOL carryback from ayear before 2014 that wasdeducted to figure line 11on page 3 of the form. . . . .

24 Add lines 22 and 23. . . . . .

Charitable contributions25from Sch A (Form 1040),line 19 (line 18 for 2004 -2006), or Sch A (Form1040NR), line 5 (line 7 for2004 through 2010), or aspreviously adjusted . . . . . .

Refigured charitable26contributions (seeinstructions). . . . . . . . .

Subtract ln 26 from ln 25. . 27

28 Casualty and theft lossesfrom Form 4684, line 18(line 23 for 2008; line 21 for2009; line 20 for 2005, 2006and 2010) . . . . . . . . . . . . .

Casualty and theft losses29from Form 4684, line 16(line 21 for 2008; line 18 for2005, 2006, and 2010; line19 for 2009). . . . . . . . . . . .

30 Multiply line 22 by10% (.10) . . . . . . . . . . .

31 Subtract line 30 fromline 29. If zero or less,enter -0- . . . . . . . . . . . .

32 Subtract ln 31 from ln 28. .

Miscellaneous itemized33deductions from Sch A(Form 1040), line 27 (line 26for 2004 - 2006), or Sch A(Form 1040NR), line 13 (line15 for 2004 through 2010),or as previously adjusted . .

34 Miscellaneous itemizeddeductions from Sch A(Form 1040), line 24 (line 23for 2004 - 2006), or Sch A(Form 1040NR), line 10 (line12 for 2004 through 2010),or as previously adjusted . .

35 Multiply line 22 by2% (.02). . . . . . . . . . . . .

36 Subtract line 35 fromline 34. If zero or less,enter -0- . . . . . . . . . . . .

Subtract ln 36 from ln 33. . 37

38 Complete the worksheet inthe instructions if line 22 ismore than the applicableamount shown in theinstructions. Otherwise,combine lines 18, 21, 27, 32,and 37; enter the result hereand on line 7 (page 3) . . . .

FDIA2334L 09/09/14 Form 1045 (2014)


2ND 1ST12/31/12 12/31/13

55,000.

55,000.

6,000.

6,000.

5,500.

0. 0. 0.

956.

2,000.

1,100.

900. 0. 0.56.

266.


2014 FORM 1045 ATTACHMENT PAGE 1


STATEMENT 1FORM 1045, LINE 16INCOME TAX

2ND 1STPRECEDING PRECEDING PRECEDINGTAX YEAR TAX YEAR TAX YEAR

INCOME TAX AFTER CARRYBACK 12/31/12 12/31/13

TAX TABLE $ 378.TOTAL $ 0. $ 378. $ 0.




How Is The NOL Carried Back? In this section we will determine how to carry back and deduct a net operating loss against prior year income, claiming a refund of taxes paid in prior years. There are two forms on which an individual net operating loss can be carried back to a prior year:

Form 1045 – Application for Tentative Refund Form 1040X – Amended U.S. Individual Income Tax Return

Form 1045 must be filed no earlier than on the date on which the tax return generating the loss is filed, and no later than the last day of the year after the loss year. For 2014 net operating losses the last day to file Form 1045 is Thursday December 31, 2015. If the last day to file Form 1045 is a Saturday, Sunday or legal holiday in the District of Columbia, the form is due the next day that is not a Saturday, Sunday or legal holiday in the District of Columbia. The IRS does not have the authority to extend the due date of Form 1045. Form 1040X can be used to carry back a net operating loss to prior years. For a net operating loss carryback, Form 1040X may be filed no earlier than the date on which the tax return generating the loss is filed. For a net operating loss carryback, Form 1040X can be filed no later than three years after the due date (including extensions) of the tax return on which the loss was generated. For net operating losses generated on extended 2014 tax returns the last day to file Form 1040X to carry back the net operating loss is Monday October 15, 2018. The primary advantage of using Form 1045 is that the IRS is required to act on the claim within 90 days of receipt. Such IRS action includes examination, return of the claim to the taxpayer for corrections, disallowance of the claim if there are computational errors, application of refunds to other tax periods, or issuance of a refund to the taxpayer. Statute of Limitations on Refunds The statute of limitations on a refund from a net operating loss carryback is controlled by the due date (including extensions) for the tax return of the loss year. A taxpayer files an extension for their 2014 Form 1040 and subsequently files that tax return on October 15, 2015. The last day to file a Form 1040X to carryback the net operating loss and claim a refund of prior year taxes paid is Monday October 15, 2018. The number of years the loss is being carried back is not material. The statute of limitations for the loss year controls the due date on which the claim must be filed.

Forms for Corporate NOL Carrybacks

Corporations may use Form 1120X, Amended U.S. Corporate Income Tax Return, or Form 1139, Corporate Application for Tentative Refund. It is recommended to use Form 1139 to expedite the processing of a refund. Form 1139 must be filed no earlier than the date the corporation files its Form 1120 for the loss year and no later than 12 months after the end of the taxable year that generated the net operating loss. The IRS will process the application within 90



days of the later of: (1) the date the corporation files the complete application, or (2) the last day of the month that includes the due date (including extensions) for filing the corporation’s income tax return for the year in which the loss arose.

If the corporation does not file Form 1139 within 12 months of the end of the loss year, it will have to use Form 1120X to carry back the net operating loss. Form 1120X can be filed no earlier than the date the corporation files its Form 1120 for the loss year and no later than 3 years after the due date (including extensions) of the year that generated the net operating loss. A Form 1120X based on a bad debt or worthless security must be filed within seven years after the due date of the return for the tax year in which the debt or security became worthless.

Converting from C to S, or S to C Net operating losses incurred while a business operated as a C corporation are not transferable to an S corporation. The unused losses are “suspended” until the S corporation reverts back to a C corporation or the time runs out on the carryover. (IRC §1371(b)) Exception: The law allows an S corporation to carry forward certain tax attributes from its C corporation years to apply against the BIG tax. (IRC §1374(d)(2)) Accordingly, it may carry forward an unused NOL or excess capital losses as a deduction against its net recognized built-in gain for the year (a capital loss carryforward can only offset a recognized built-in gain that is characterized as a capital gain). Similarly, the corporation may apply any of its unused business credits against this tax.



PART IV – SPECIAL ISSUES WITH JOINT AND SEPARATE TAX RETURNS, DECEASED SPOUSES & DIVORCED TAXPAYERS

All joint returns. When married taxpayers file joint tax returns for each year involved in calculating a net operating loss and the related carryback and carryover, the net operating loss is a joint net operating loss. Such loss will be calculated the same as an individual, but treated as a joint net operating loss. All separate returns. When married taxpayers file separate returns for each year involved in calculating a net operating loss and the related carryback and carryover, the net operating loss is a separate net operating loss. Such loss is calculated as shown earlier in this text and can be applied only against the income of the spouse generating the net operating loss. Separate (always married to each other) loss carried to a joint return. Married taxpayers who file joint returns in any carryback or carryover year, but separate returns for any year in which a net operating loss or net operating loss deduction is calculated, should treat the separate carryback or carryover as a joint carryover. Example: Husband and Wife were married (to each other) and file separate returns for 2012 and 2013, and a joint return for 2014. Any net operating loss generated by either Husband or Wife in 2012 or 2013 and carried forward to 2014 is considered a joint net operating loss. Separate (not married to each other) loss carried to a joint return. Taxpayers who generated net operating losses when not married to each other can only use their separate net operating loss against their separate income, even if filing a joint return to which the net operating loss is carried. Joint return loss carried to separate year. In the joint return year, calculate each spouse’s net operating loss as if they were filing a separate return. If only one of the spouses has a net operating loss, there are no further calculations necessary. Only the spouse with the net operating loss can carry back (or elect to waive the carryback period and carry forward) the net operating loss. The entire joint net operating loss is available to the spouse with a separate net operating loss, regardless of the amount calculated as their separate net operating loss. If both spouses generated a net operating loss it is necessary to calculate each spouse’s portion of the net operating loss. The joint net operating loss will be divided between the two spouses (H & W) as follows: H’s separate NOL ------------------------------------------------ X Joint NOL = H’s share of joint NOL (H’s separate NOL + W’s separate NOL) The balance of the joint NOL belongs to W.



Example 7 – Joint NOL Carried to Separate Years Harry & Wilma filed a joint tax return in 2014 showing a net operating loss of $10,000. They carry the loss back to 2012 when they filed separate tax returns. When calculated separately, Harry’s net operating loss is $2,000 and Wilma’s net operating loss is $6,000. How much of the $10,000 net operating loss can each spouse carry back to their separate 2009 tax returns? Harry’s portion of the net operating loss is calculated by dividing his separately calculated NOL of $2,000 by the combined separately calculated net operating losses of both spouses of $8,000 to determine his percentage of the joint of net operating loss. Harry’s percentage is 25%. ($2,000 / $8,000 = 25%). Harry multiplies the joint net operating loss by 25% to determine how much of the joint net operating loss he is allowed to carry back to his 2012 tax return. Harry can carry back $2,500 of the net operating loss. $2,000 / ($2,000 + 6,000) = 25% X $10,000 = $2,500 Wilma’s share of the joint net operating loss is the balance after subtracting Harry’s share. Joint net operating loss $ 10,000 Harry’s separate share (2,500) Wilma’s separate share $ 7,500 Single taxpayer NOL carryback to joint return. When a single taxpayer carries a net operating loss back to a joint return year it is necessary to determine how much of the joint tax liability is allocable to each spouse and how much each spouse contributed toward the credits on the joint tax return. The joint tax liability is allocated to each spouse in a six-step formula.

1. Calculate the liability of each spouse as if they filed separately, allowing the net operating loss only to the spouse who is carrying it back to the joint year.

2. Add the separate liabilities of each spouse together. 3. Calculate the percentage of the combined separate liabilities allocable to each spouse. 4. Multiply the percentage determined in step three times the joint liability, taking into

consideration the net operating loss carryback. The net operating loss carryback cannot reduce the separate taxable income of the spouse with the NOL below zero.

5. Allocate the credits for estimated tax payments, withholding and other credits to each spouse.

6. Subtract the amount determined in step four from each spouse’s allocable credits to arrive at the refund available.



In calculating the separate income, deductions and credits for each spouse, follow the rules applicable to the state in which the taxpayers are domiciled. For community property states the IRS has issued guidance on how to allocate credits for withholding, estimated taxes and other credits. For taxpayers domiciled in Arizona or Wisconsin see Rev. Rul. 2004-71, 2004-2 CB 74. For taxpayers domiciled in California, Idaho or Louisiana see Rev. Rul. 2004-72, 2004-2 CB 77. For taxpayers domiciled in Nevada, New Mexico or the state of Washington see Rev. Rul. 2004-73, 2004-2 CB 80. For taxpayers domiciled in Texas see Rev. Rul. 2004-74, 2004-2 CB 84.



Example 8 – Single NOL Carryback to Joint Year Ricky and Lucy were married and filed a joint tax return for the year 2012. They divorced in 2013. In 2014 Lucy used the single filing status and sustained a net operating loss of $30,000 and did not elect to waive the carryback period. Lucy must carry back her 2014 net operating loss to 2012. In 2012 Ricky earned wages of $49,650 and Lucy earned wages of $69,650. Ricky had $5,000 of federal income tax withholding and Lucy had $10,000. Ricky paid real estate taxes of $10,000; Lucy paid mortgage interest of $20,000; and they made charitable contributions of $2,000 from joint funds. Calculate Lucy’s refund of income taxes in 2012 from the NOL carryback. Ricky Lucy Total AGI $ 49,650 $ 69,650 $ 119,300 Itemized deductions: Real Estate Taxes $ 10,000 (10,000) -0- (10,000) Mortgage interest 20,000 -0- (20,000) (20,000) Contributions 2,000 (1,000) (1,000) (2,000) Total Itemized Deductions $ 32,000 (11,000) (21,000) (32,000) Personal Exemption (3,650) (3,650) (7,300) Subtotal 35,000 45,000 80,000 NOLD (Lucy only, cannot reduce -0- (30,000) (30,000) Taxable income below $0) Recomputed taxable income 35,000 15,000 50,000 Tax (MFS rates) 4,544 1,436 5,869* STEP 1 Allocate share of joint tax liability: Ricky [4,544 / (4,544 + 1,436)] X 5,869 4,460 STEPS Lucy [1,436 / (4,544 + 1,436)] X 5,869 1,409 2, 3 & 4 Allocate credits & withholding 5,000 10,000 STEP 5 Lucy’s Refund $ 8,591 STEP 6 * Tax on combined income calculated using MFJ rates.



PART V – GETTING THE CARRYBACK CLAIM ACCEPTED BY THE IRS THE FIRST TIME

The IRS processed 60,865 individual carryback loss refunds totaling approximately $1.2 billion in Fiscal Year 2007. Errors on these claims cause delays in processing and additional work for both taxpayers and the IRS. We reviewed a sample of 84 cases from prior tax years and found 50 percent contained 1 or more errors. Of those with errors, 57 percent were not corrected by the IRS.

“Processing of Carryback Loss Claims Needs to be Improved to Ensure Taxpayers Receive Accurate Refunds” TIGTA Report February 21, 2008.

The most common errors cited by the Treasury Inspector’s report fell into three categories: Alternative minimum tax, charitable contribution deductions, and IRS changes to originally filed loss year tax returns. Both Form 1045 and Form 1040X are frequently returned to taxpayers because the IRS identified computational errors or did not have adequate information available on the claim to ascertain whether the calculations were accurate. Treasury Regulation §1.172-1 (c) requires that every taxpayer claiming a net operating loss deduction attach a statement showing all material and pertinent facts relating to the computation of the net operating loss deduction. Taxpayers are required to include a detailed schedule showing the computation of the net operating loss deduction. The instructions to Form 1045 indicate that the following items should be attached to the claim:

• Form 1040, pages 1 & 2 • Form 4952 – Investment Interest Expense Deduction • All Schedules K-1 that contribute to the carryback • Any application for extension of time to file the loss year return • Forms 8886 – Reportable Transaction Disclosure Statement • Forms 8302 – Electronic Deposit of Tax Refund of $1 Million or More • All other forms and schedules from which a carryback results, such as:

o Schedules C and/or F, o Form 3800 – General Business Credit, o Form 6478 – Alcohol & Cellulosic Biofuels Credit, o Form 6781 – Gains and Losses from Section 1256 Contracts, or o Form 6251 – Alternative Minimum Tax



• All forms or schedules for items refigured in the carryback years, such as Form 3800, Form 6251, or Form 6781.

The instructions caution that failure to attach the required forms or to complete all applicable lines on Form 1045 may result in the claim being disallowed. Before preparing the claim Obtain a power of attorney from the client and use IRS e-services to secure a Record of Account. The Record of Account contains an Account Transcript and a Tax Return Transcript. Verify that the tax returns you are using for all carryback and intervening years match the IRS records, and that they have actually been filed. The Account Transcript shows the exemptions claimed, filing status, AGI, taxable income, tax per return, self-employment tax for each spouse, the date that the return was processed and all monetary transactions in the account. The Tax Return Transcript will show filing status, dependents, every line on the Form 1040 and any differences in computations made by the IRS computers. Selected lines from each schedule or form attached to the Form 1040 will also be present. If there are significant differences between the IRS computed amounts and the tax return amounts verify that no additional taxes were assessed or reduced on the Account Transcript. Loss Year Verify the calculations included in the net operating loss – Form 1045, Schedule A. The amounts on the Schedule A are populated by your tax software, but may not be correct. Make sure that all income and deductions are properly categorized as either business or nonbusiness. Be sure to verify the calculations of both the regular net operating loss and the alternative tax net operating loss. There can be significant differences between the two losses. If you are filing the claim more than a few weeks after the original return, verify that the original return has posted to the IRS system and that there have been no changes made to the return. Carryback and Intervening Years Make sure that you have complete copies of the carryback and intervening years. If you will be calculating the reduction in tax liability on returns that your office has prepared, make a copy of the tax file in your software. Do not use the original return file to prepare the claim – preserve it to keep a copy of the original return.



The Claim (Form 1045 or Form 1040X) If you are filing Form 1045, be sure that the return will be received by the IRS no later than the last day of the calendar year following the loss year. If it is received after that date it will be summarily rejected. Prepare a schedule of attachments to the claim. The schedule of attachments should be immediately behind the Form 1045 or Form 1040X. List each item attached to the claim and separate each attachment with tabs or colored paper. Print the title of each attachment on the separating pages/tabs. Attach a complete copy of the loss year tax return. Use a watermark or stamp “COPY – DO NOT PROCESS” across each page of the loss year tax return. Attach any external documents that contribute to the net operating loss: Schedules K-1 (with supporting detail) from all partnerships, corporations and trusts. Attach a copy of each carryback and intervening year tax return as originally filed (or adjusted). Use a watermark or stamp on each page to indicate that this copy is the tax return as originally filed (or adjusted). The watermark should read, “As originally filed” or “Before net operating deduction.” Force your tax software to include Form 6251 – Alternative Minimum Tax on each original return, even if it was not filed with the original return. Attach a copy of each carryback and intervening year tax return after the NOLD has been included on the return. Use a watermark or stamp on each page to indicate that this copy of the tax return is “After net operating loss carryback.” Force your tax software to include Form 6251 – Alternative Minimum Tax on each original return. Verify that the charitable contribution deduction was not limited in the carryback or intervening year. Attach a worksheet showing the net operating loss utilization in each carryback or intervening year. Attach a worksheet showing the alternative tax net operating loss utilization in each carryback or intervening year.



SAMPLE SCHEDULE OF ATTACHMENTS TO FORM 1045

FRED AND WILMA FLINTSONE ATTACHMENTS TO FORM 1045

SSN: 012-34-5678 1. 2014 FORM 1040 AS ORIGINALLY FILED

2. 2014 FORMS K-1 (1065) FROM ILOSTITALL, LLC

3. 2012 FORMS 1040 AND 6251 BEFORE NET OPERATING LOSS CARRYBACK

4. 2012 FORMS 1040 AND 6251 AFTER NET OPERATING LOSS CARRYBACK

5. 2013 FORMS 1040 AND 6251 BEFORE NET OPERATING LOSS CARRYBACK

6. 2013 FORMS 1040 AND 6251 AFTER NET OPERATING LOSS CARRYBACK

7. NET OPERATING LOSS UTILIZATION WORKSHEET

8. ALTERNATIVE TAX NET OPERATING LOSS UTILIZATION WORKSHEET



PART VI – ALTERNATIVE MINIMUM TAX CONSIDERATIONS Alternative Tax Net Operating Loss. The calculations to arrive at the alternative tax net operating loss (ATNOL) are the same as those used to calculate the regular tax net operating loss, but with all of the alternative minimum tax (AMT) adjustments and preference items included. To calculate the ATNOL, start with alternative minimum taxable income (AMTI) before any ATNOL and then apply the same rules used when calculating a regular net operating loss. i.e. No deduction for a NOL, no deduction for capital losses, no deduction for personal exemptions (or the AMT exemption), no deduction for nonbusiness deductions in excess of nonbusiness income, etc. Because AMTI is the starting point, consider the following adjustments when calculating the ATNOL (not an exhaustive list): IRC §56(a)(1)(A)(i) Depreciation. Generally, depreciation on tangible personal property is calculated for regular tax purposes using the 200% declining balance method for regular tax purposes. For AMT depreciation on most 3-, 5-, 7-, and 10-year property is calculated using the 150% declining balance method. IRC §56(a)(3) Long-Term Contracts For long-term contracts the percentage completion method of accounting must be used. The completed contract method of accounting is not allowed for purposes of calculating AMTI. Home construction contracts, as defined in IRC §460(e)(6), are excluded from the requirement to use percentage completion for AMT purposes. IRC §56(b)(1)(A)(ii) Limitation on deductions.

• Miscellaneous itemized deductions are not allowed in calculating AMTI. • No deduction is allowed for state and local real property taxes; state and local personal

property taxes; or state, local and foreign income taxes. No deduction is allowed for the general sales tax deduction. (State income tax refunds are not included in AMTI. IRC §56(b)(1)(D)).

IRC §56(b)(1)(B) Medical Expenses. Medical expenses are allowable to the extent that they exceed 10% of AGI rather than 7.5% prior to 2013. Except for those over age 64, after 2012 this adjustment disappears as medical expenses must exceed 10% of AGI for regular tax and AMT. IRC §56(b)(1)(C) Interest.

• Interest paid on home equity debt is not allowed in calculating AMTI. Additionally, the definition of a qualified residence does not include a boat.

• Tax-exempt interest on specified private activity bonds is included in AMTI. IRC §57(a)(7) Exclusion of Gains on Sale of Certain Small Business Stock. 7% of the gain excluded under IRC §1202 is a tax preference item unless the stock was acquired after September 27, 2010 and before January 1, 2015. In the case of stock acquired after September 27, 2010 and before January 1, 2015 there is no AMT preference. (§1202(a)(4)(C))



IRC §56(a)(4) Alternative Tax Net Operating Loss Deduction The alternative tax net operating loss deduction shall be allowed in lieu of the net operating loss deduction allowed under section 172.

Rules for calculating the alternative tax net operating loss deduction (ATNOLD) are found in IRC §56(d) – Alternative tax net operating loss defined. These ATNOLD rules are generally the same as for calculating the regular net operating loss deduction with two notable exceptions. First, an ATNOLD is calculated using all of the adjustments and preference items applicable in calculating alternative minimum taxable income (but only to the extent that the preference item increased the NOL). Second, the ATNOLD is generally limited by a percentage of alternative minimum taxable income. The ATNOLD is limited to the lesser of:

1. The amount of the ATNOLD* calculated with consideration of all adjustments and preferences in IRC §§57 & 58, or

2. 90% of AMTI without any deduction under IRC §199

PLUS The lesser of:

1. The amount of the ATNOLD** for losses for which an election under IRC §172(b)(1)(H) was made, or

2. AMTI without any deduction under IRC §199. * The ATNOLD in this clause does not include ATNOL’s for which an election under IRC §172(b)(1)(H) was made. ** The ATNOLD referred to in this clause is the result of a NOL from 2008 or 2009 where the taxpayer elected to carry the NOL back 3, 4 or 5 years. Any item of tax preference under IRC §57 is only taken into account to the extent that it increased the ATNOL for the year. IRC §56(d)(2). The effect of this section is to allow an ATNOLD to offset 90% of AMTI. The notable exception is that there is no 90% limitation for an ATNOLD that is a carryover from 2008 or 2009 where the election under IRC §172(b)(1)(H) was made. Any ATNOLD resulting from a federally declared disaster or from Go Zone losses is also allowed to offset AMTI without the 90% of AMTI limitation. IRC §§56(d)(3), 1400N(k).



PART VII – CALIFORNIA California conforms for IRC §172 with multiple exceptions. For taxable years beginning on or after January 1, 2013, a taxpayer will carry a net operating loss back two years or elect to waive the carryback period. (R&TC §§17276.20(c)(1), 17276.22, 24416.20(d)(2), 24416.22) The amount of a net operating loss that can be carried back is limited to:

• 50% of the NOL incurred in the 2013 taxable year; • 75% of the NOL incurred in the 2014 taxable year; and • 100% of the NOL incurred in the 2015 or any subsequent taxable year.

Example 9 – California NOL Carryback George incurs a $100,000 NOL in 2014. He carries back $75,000 ($100,000 x 75%) two years to 2012. When he computes his carryback, he uses $25,000 in 2012 and 30,000 in 2013. He will carry $45,000 forward to 2015. 2014 Net operating loss $ 100,000 Maximum carryback 75,000 NOL absorbed in 2012 (25,000) NOL absorbed in 2013 (30,000) Unused carryback 20,000 2014 NOL not carried back 25,000 NOL carry forward to 2015 45,000 George can carry forward the 2014 NOL until 2033. Waiving the Carryback Period California conforms to IRC §172(b)(3) requiring a net operating loss to be carried back unless an election is made to waive the carryback period. The election to waive the carryback period is made by checking a box on Form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitation – Individuals, Estates and Trusts. An election to waive the carryback period on a federal return will not waive the carryback period on a California return. Corporations make the election to waive the carryback period by checking the box in Part I of Form 3805Q, net Operating Los (NOL) Computation and NOL and Disaster Loss Limitations – Corporations. The election, once made, is irrevocable for both individuals and corporations.

Section C ' Election to Waive Carryback

Check the box if the Individual, Estate, or Trust elects to 'relinquish' the entire carryback period with respect to a 2014 NOL under IRC

Section 172(b)(3). By making the election, the Individual, Estate, or Trust is electing to carry an NOL forward instead of carrying it backin the previous two years. Once the election is made, it is irrevocable. See instructions.Continue with Part II, Determine 2014 Modified Taxable Income (MTI) and Part III, NOL Carryover and Disaster Loss CarryoverLimitations. Do not complete Part IV, NOL Carryback.

Part II Determine 2014 Modified Taxable Income (MTI). Be sure to read the instructions for Part II.

11 Taxable income. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Enter amounts on line 2 through line 4 as if they were all positive numbers.

Capital loss deduction included in line 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

3 3Disaster loss carryover included in line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 4NOL carryover included in line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5MTI. Combine line 1 through line 4. If line 5 is zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part III NOL Carryover and Disaster Loss Carryover Limitations. See Instructions.

(g)Available balance

1 1MTI from Part II, line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prior Year NOLs

(a) (b) (c) (d) (e) (f) (h)Type ofYear of Code Initial loss Carryover Amount used Carryover to 2015NOLloss from 2013 in 2014See instructions col. (e) ' col. (f)Seebelow*

2 >> > >> >>

> > > >> >>

> > > >> >>

> > > >> >>col. (d) ' col. (f)

Current Year NOLs See Instructions

20143 > > >> >DIS

4 2014 > > > >

> > >2014 >

> >2014 > >

> >2014 > >*Type of NOL: General (GEN), New Business (NB), Eligible Small Business (ESB), or Disaster (DIS).

5 5NOL carryover. Add the carryover amounts in column (h) that are not the result of a disaster loss. . . . . . . . . . . >6 Disaster loss carryover. Enter the total loss carryover amounts in column (h) that are the result of

6disaster losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . >

7533144 CAIZ8003L 01/02/15 FTB 3805V 2014 Side 3059For Privacy Notice, get FTB 1131 ENG/SP.


( 85,500.)

30,000.0.

80,000.

X

2013 GEN 30,000. 30,000. 0. 0. 30,000.

GEN 50,000. 50,000.




The election to waive the carryback period must be made by the due date of the tax return (including extensions) for the loss year. Taxpayers who failed to make the election on an original return can make the election within six months of the due date of the return (excluding extensions). The election is irrevocable for the year once made. California and federal elections must be made separately, and do not have to be the same. A taxpayer may elect to waive the carryback period on their federal tax return, but not their California return, or vice-versa. California Carryforward Periods and Suspended Losses California NOL carryforward provisions conform to federal rules for taxable years beginning on or after January 1, 2008.

California NOL Carryforward Provisions TYBOA Carryforward Years January 1, 1987 & before January 1, 2000 5 years January 1, 2000 & before January 1, 2008 10 years January 1, 2008 20 years California has suspended the utilization of NOL deductions multiple times. Whenever an NOL deduction has been suspended (denied), the carryover period has been extended. Taxable Year NOL Deduction Denied Number of Years Added to

Carryover Period 2002 loss denied in 2003 1 year Losses from years prior to 2002 and suspended in 2002 and/or 2003

2 years

Losses from 2010 denied in 2011 1 year Losses from 2009 denied in 2010 or 2011 2 years Losses from 2008 denied in 2009, 2010 or 2011 3 years Losses from years prior to 2008 denied in 2008, 2009, 2010 or 2011

4 years

Under the California NOL suspension provisions, the carryover period for each year’s NOL is extended only where an NOL deduction was denied, in whole or in part, due to the application of the suspension provisions. Consequently, not all NOLs receive an extended carryover period during a suspension period. If a taxpayer would have been able to use an NOL, but it was disallowed because of the suspension provisions, the carryforward is extended.



If an NOL was carried forward because a taxpayer could not utilize it due to income limitations in a suspension year, then the NOL does not receive an extension of the carryforward period.

Example June had a $200,000 NOL from 2007. In tax years 2008 through 2011 her AGI was zero, so the NOL was carried forward to 2012. Because she was unable to use any of the loss – not because of the suspension but because of her limited income – she does not add any years to the NOL carryforward. Like federal law, California requires that net operating losses be utilized chronologically. The oldest net operating loss must be utilized first, even if it has a later expiration date. Chronological use interacting with the suspension periods can produce an odd result – older NOLs surviving longer than newer NOLs.



Example of California NOL Use Unlucky Corporation has the following income and loss amounts for the 2001-2013 taxable years:

• 2001 – $2,727,272.73 loss (NOL carryforward is limited to 55% in 2001, so carryforward is $1,500,000 (55% x $2,727,272.73))

• 2002 – $400,000 of taxable income • 2003 – $1,666,666.67 loss (NOL

carryforward is limited to 60% in 2003, so carryforward is $1,000,000 (60% x $1,666,666.67))

• 2004-2007 – No income or loss • 2008 – $650,000 of taxable income • 2009-2012 – No income or loss • 2013 – $1,000,000 of taxable income • 2014 – $100,000 of taxable income

As of the first day of Unlucky’s 2015 taxable year, the remaining carryover amount and carryover period for Unlucky’s 2001 and 2003 NOL’s is calculated as follows:

Tax Year

Taxable Income

2001 NOL used

2001 NOL

Balance

2001 NOL

expires

2003 NOL used

2003 NOL

balance

2003 NOL

expires 2001 (1,500,000) N/A 1,500,000 2011 N/A N/A N/A 2002 400,0001 0 1,500,000 20131 N/A N/A N/A 2003 (1,000,000) 0 1,500,000 2013 N/A 1,000,000 2013 2004-2007

0 0 1,500,000 2013 0

1,000,000 2013

2008 700,000 0 1,500,000 20172 0

1,000,000 2013

2009-2012

0 0 1,500,000 2017 0

1,000,000 20133

2013 1,000,0000 1,000,000 500,000 2017 0 0 Expired 2014 100,000 100,000 400,000 2017 0 0 Expired 1NOL suspended in 2002. Add two years to expiration date. 2NOL suspended in 2008. Add four years to expiration date. 3Althouth NOL was suspended in 2008, it did not affect 2003 NOL because the entire taxable income would have been absorbed by the 2001 NOL. Unlucky has $500,000 of NOL carryforward remaining, which can be carried forward until 2017. The carryforward is extended to 2017 because the original 10-year carryforward period was extended by two years when the NOL was suspended in 2002, and an additional four years when it was suspended in 2008. The 2003 NOL expired in 2013 because it was never suspended, so the carryforward period was never extended.



California Conformity/Nonconformity Issues Carryback periods Federal law allows for multiple carryback periods (i.e. 3-year carryback for theft losses, 5-year carryback for farm losses, and 10-year carryback for product liability losses). California only has a 2-year carryback period regardless of the type of loss. Tentative Refund (Form 1045) Federal law allows a taxpayer to carry back an NOL by filing an amended return for the carryback year for filing Form 1045, Application for Tentative Refund, which requires the IRS to act within 90 days of receipt of the claim. California does not have an equivalent form to the IRS Form 1045. All NOL carrybacks must be done on amended tax returns. Interest Paid on Refunds For federal purposes, if an overpayment is from the carryback of an NOL, the overpayment is deemed to arise on the filing date of the original return from which the NOL arose. (IRC §6611(f)(1)). California law allows for interest to be paid on overpayments of tax from the date from the date of the overpayment to the date paid, less processing time. Therefore, the general rule for payment of interest is applied. Interest will be paid from the original due date of the return to which the NOL is carried back, regardless of when the refund claim is filed.

Example of NOL carryback interest payment

Butch had an NOL in 2014. He carried the loss back to 2012 for both federal and California purposes. When he carries the NOL back on his federal return, the IRS will not pay interest if the refund is paid within 45 days of the claim. However, the FTB will pay interest from April 15, 2013, (the due date of the 2012 return) until the date the refund is paid. Statute of Limitations The special rule that extends the statute of limitations for the carryback year to that of the loss year does not apply for California. Consequently, there is not extension to statute of limitations for the carryback year in California.



Example of statute of limitations In 2014, Tom generated an NOL, 75% of which was carried back to taxable year 2012, and

he filed the amended 2012 return on April 15, 2015.

The federal statute of limitations for the 2014 return is April 17, 2018. The normal federal statute of limitations for the 2012 year is April 18, 2016. However, when Tom amends the 2012 taxable year return on April 15, 2015, carrying back the 2014 NOL and reducing the 2012 net income, the federal statute of limitations for the 2012 year is extended until April 17, 2018.

For California, the four-year statute of limitations for the 2012 year is April 18, 2017. When the NOL is carried back, the statute of limitations is not extended and remains April 18, 2017. Change in Residence A nonresident segregates California income and losses from out- of-state income and losses, and the taxpayer may have a California-source NOL even if there is no NOL from income from all sources. Thus, it is important to file returns to compute the NOL for a nonresident who has California losses. (R&TC §17041(i))

Example of Texas resident with California NOL Hap P. Trails is a Texas resident in 2015 with a California rental property that has a net loss of $11,000 and Texas wages of $100,000. He has a California NOL of $11,000 that he can carry forward to offset California gains in a future year. A former nonresident must recompute the NOL using income and deductions from all sources to compute the California NOL.

Example of new resident with NOL Assume that Hap becomes a California resident in 2016. He must recompute his California NOL as if he had been a California resident in all prior years. As a “resident” in Year 1, he would not have had an NOL because his wages were greater than his rental loss. Thus, he cannot offset his California income while a resident with the NOL incurred as a Texas resident.


© Mark Seid, CPA, EA, USTCP 2015

GLOSSARY

Adjusted gross income (AGI): total income reduced by allowable adjustments, such as for an IRA, student loan interest, alimony and Keogh deductions. The AGI is important in determining whether various tax benefits are phased out. Alimony: funds paid to a former spouse in connection with a divorce or separation under §71. Such payments are taxable to the recipient and deductible by the payor under §215 Alternative minimum tax: a tax triggered when certain tax benefits reduce regular income tax below a certain threshold Annuity: series of equal periodic payments or receipts. Examples of an annuity are semiannual interest receipts from a bond investment and cash dividends from a preferred stock Asset: a resource expected to provide future economic benefits. Anything owned that has monetary value. Any interest in real or personal property. Property, including cash, that has value Built-in gain: a gain that accrued before a C corporation was converted to an S corporation Capital gains: gain from the disposition or exchange of a capital asset Capital loss: loss from the disposition or exchange of a capital asset Carryback: the application of a deduction or credit from a current tax year to a prior tax year Carryforward: the act of applying a loss or credit from a current year to a later year Community property: a property held by a married couple domiciled in a community property state or a foreign country with a community property system. Property that belongs equally to husband and wife. In community property states, generally amount earned by the labor of either spouse, and the income from such amounts becomes community property Dependent: individual who is supported by a taxpayer with respect to whom the taxpayer is entitled to claim an exemption allowance on his income tax return Depreciation: spreading out of the original cost over the estimated life of the fixed assets such as plant and equipment. Depreciation reduces taxable income Dividend: distribution of earnings paid to stockholders based on the number of shares owned Estate tax: a levy paid to the federal government or state on a deceased person’s assets that have been left to heirs. The estate pays the tax, not the recipients. No estate tax exists for property going from one spouse to another



Exclusion: income which is allowed by the Code to be excluded from gross income. The term may also be used to refer to amounts which may be excluded for estate tax, gift tax, and self-employment tax purposes Fiscal year: a 12 month accounting period other than a calendar year Gain: excess of money or fair value of property received on sale or exchanged over the carrying value of the item Gross income: money, goods, services, and property a person receives that must be reported on a tax return. Includes unemployment compensation and certain scholarships. It does not include welfare benefits and nontaxable Social Security benefits Net operating loss: a business loss that exceeds current income and may be carried back against income of prior years or carryforward as a deduction against future income Partnership: form of business organization created by an agreement between two or more persons who contribute capital and/or their services to the organization Personal exemption: amount an individual can exclude from taxable income Personal residence: a home of an individual. It is the place to which an individual plans to return as a home after temporary absences Recapture: Inclusion of depreciation deducted in previous years in this year's taxable income SIMPLE IRA: a Savings Incentive Match Plan for Employees. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SIMPLE IRA plan, employees and employers make contributions to traditional IRAs set up for employees (including self-employed individuals), subject to certain limits. It is ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a retirement plan. To establish a SIMPLE IRA plan, the business must have less than 100 employees and cannot have any other retirement plan Suspended losses: losses from passive activities which cannot be used in the current year Tax year: an annual accounting period for reporting income and keeping records Trust: an agreement in which the trustee takes title to property (called the corpus) owned by the grantor (donor) to protect or conserve it for either the grantor or the trust’s beneficiary. The trust is established by the grantor. The trustee is typically given authority to invest the property for a return. Trust may be revocable or irrevocable



INDEX

A Alternative minimum tax (AMT) .......17, 23, 44 Alternative minimum taxable income (AMTI)

.................................................................. 44, 45 Alternative tax net operating loss .... (ATNOL)

................................................. 17, 41, 42, 44, 45

B Business capital ................................... 2-5, 12, 25

C C corporation .............................................. 20, 35

F Farming ..................................................15, 16, 18 Farming business ............................................. 16 Federally declared disaster ..................14, 15, 45

G Gross income ....................... 1, 2, 4, 12, 24, 27, 28

L Loss year . 14, 16, 18, 23-25, 34, 35, 40, 42, 48, 51

N Net operating loss deduction .... 2, 10, 21-26, 28,

36, 40, 45 Nonbusiness capital .................. 2-5, 8, 10, 12, 25 Nonbusiness income .................. 2, 4, 5, 7, 10, 44

Q Qualified disaster loss ................................ 15, 17

S S corporation ................................................. 8, 35 Self-employment tax ........................................ 41 Statutory loss ............................................... 1, 2, 7

T Taxpayer Relief Act of 1997....................... 15, 21

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We need your professional license/registration number(s) for continuing education credit.CPA No. PA No. PTIN

EA No. CRTP (CTEC) No. Bar No.

This webinar is designed to meet the requirements for the specified number of hours of continuing education. This webinar has been designed to meet the requirements of the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at 714-776-7850. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA 95812-2890, or by phone at 877-850-2832, or on the internet at www.CTEC.org.

Property Tax Change in Ownership Dell and the new millenniumPresented by: Cameron Hess, Esq., CPA

Friday, December 4 — 10 a.m. to Noon Pacific Time

source code: WEB15

Preparing Returns for Medical Marijuana Dispensaries

Presented by: Adam S. Fayne, Esq.Wednesday, December 16 — Noon to 2:00 p.m. Pacific Time

— Or order on-demand and watch anytime —

With this two-hour webinar, you will:

• Learn what is and is not deductible for sale of marijuana • Uncover additional costs that are included in COGS• Address your concerns about preparing returns for the

marijuana industry• Understand the tax penalties that go with a cash business• See why you should hire an attorney if your client is audited • Review recent cases and rulings

Get the most practical CPE without leaving your office.

P.O. Box 61044 • Anaheim, CA 92803-6144 • E-mail: [email protected]: (714) 776-7850 • Fax: (714) 776-9906 • website: caltax.com

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About the presenter:

Adam S. Fayne, Esq.

Adam S. Fayne is a partner in Arnstein and Lehr, LLP’s, tax, corporate, and white collar criminal practice groups in the Chicago office. Mr. Fayne’s tax practice focuses in the areas of tax controversy, tax planning, corporate advisory, and white collar criminal matters. Mr. Fayne has been assisting clients in the Medical Cannabis/Marijuana industry. His background in regulatory and compliance, as well as his corporate expertise, allows him to counsel a number of clients in the Medical Cannabis Industry with their going forward legal needs. Mr. Fayne regularly counsels cannabis operators and investors with respect to Internal Revenue Code Section 280E and best practices to minimize federal and local taxes.

$89 Webinar — Add CPE for only $19 per additional attendee You must have computer speakers to listen to this webinar

Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. This webinar is designed to meet the requirements for two hours of continuing education for the California Board of Accountancy. Level: Basic. Field of Study: Taxation. Delivery method: Group Internet-Based. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) 776-7850. There are no prerequisites or advanced preparation required.

Additional CPE Cost: $19 per attendee

# #

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$89 webinar includes:

Card Number

Billing ZIP Exp. Date Security Code

Signature

Name

Company Name

Address

City/State/ZIP

Phone Fax

E-mail

Fill out and fax to (714) 776-9906 today!

Preparing Returns for Medical Marijuana Dispensaries ... $89.00*

G Live: Wed., December 16 — Noon to 2:00 p.m. Pacific Time*

G On-Demand: Watch anytime! (Available December 23, 2015)

Additional Attendee CPE Information:Name E-mail address License/Registration number

Register by fax (714) 776-9906 or phone (714) 776-7850 Register by mail P.O. Box 61044 • Anaheim, CA • 92803-6144 Register online www.caltax.com

TOTAL $ ___________

G Payment enclosed. Check # _____________

G Charge my: G MC G Visa G AmEx G Discover

*No refunds will be given after noon on December 15, 2015.

CPE @ $19 per additional attendee per webinar QTY: _______ This course qualifies for up to 2 hours of CPE for one attendee.

Preparing Returns for Medical Marijuana Dispensaries

• CPE for one attendee: 2 hours for CPAs, 2 federal tax hours for EAs and CRTPs (CTEC), and 1.5 General MCLE for attorneys

• Reference manual and PDF of PowerPoint slides• Add CPE for only $19 per additional attendee (Must complete exam for credit)

We need your professional license/registration number(s) for continuing education credit.CPA No. PA No. PTIN

EA No. CRTP (CTEC) No. Bar No.

This webinar is designed to meet the requirements for the specified number of hours of continuing education. This webinar has been designed to meet the requirements of the IRS Return Preparer Office; including sections 10.6 and 10.9 of Department of Treasury’s Circular No. 230 (Provider No. CRA7E); the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at 714-776-7850. There are no prerequisites required. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA 95812-2890, or by phone at 877-850-2832, or on the internet at www.CTEC.org.

Preparing Returns for Medical Marijuana DispensariesPresented by: Adam S. Fayne, Esq.

Wednesday, December 16 — Noon to 2:00 p.m. Pacific Time— Or order on-demand and watch anytime —

source code: WEB15

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