N. Net Economic Loss Carry-Over (G.S. 105-130.8)

  1. Preliminary Statement
    In order that some measure of relief may be granted to corporations which have incurred economic misfortune or which are otherwise materially affected by strict adherence to the annual accounting rule in determining taxable income, the statute provides for the carrying forward of a net economic loss for a period of fifteen (15) years, subject to certain limitations:

    1. Effective until January 1, 2002. A net economic loss carried forward from any year shall first be applied to, or offset by, to any income taxable or nontaxable of the next succeeding year before any portion of the loss may be carried forward to a succeeding year, except that a loss that is more than five years old may offset no more than 15% of any taxable income before the remaining portion may be carried forward to a succeeding year.
    2. Effective January 1, 2002. A net economic loss carried forward form any year shall first be applied to, or offset by, any income taxable or nontaxable of the next succeeding year before any portion of the loss may be carried forward to a succeeding year.

  2. Differences Between North Carolina and Federal Provisions
    The loss deduction allowed for North Carolina income tax purposes differs from the loss deduction permitted for Federal income tax purposes in two principal ways:

    1. For North Carolina tax purposes, the loss must be a net economic loss rather than a net operating loss.
    2. For North Carolina tax purposes, a loss can only be carried forward, whereas under the Federal law a loss may also be carried back to years preceding the loss-year.
  3. Definition of Net Economic Loss
    A net economic loss is the amount by which allowable deductions, other than prior years' losses, exceed income from all sources in the year including any income not taxable. Dayco Corporation v. Clayton, Commissioner of Revenue (1967), 269 N.C. 490,153 S.E. 2nd 28.
  4. Income Not Taxable
    Income not taxable includes any income item which has been deducted in computing State net income under G.S. 105-130.5, any nonbusiness income which has been allocated directly to another state under G.S. 105-130.4 and any other income which is not taxable under State law. (See Dayco Corporation v. Clayton)
  5. Procedure for Deducting a Net Economic Loss
    A net economic loss is carried forward from the loss year and deducted from income in the next succeeding year. However, any such loss carried forward must be reduced or offset by any income not taxable received in the succeeding year in determining the amount of net economic loss deduction in such succeeding year. Any unused portion of a net economic loss remaining may be carried forward to the next succeeding year. (See Dayco Corporation v. Clayton)

    Effective for taxable years beginning on or after January 1, 1999 and until years beginning January 1, 2002, corporations may deduct net economic losses that are more than 5 years old on a limited basis. The limitation is that the taxpayer may not offset more than 15% of the taxable income during a taxable year. This provision for the deduction of losses older than 5 years would start with losses incurred for taxable years beginning on or after January 1, 1993.

    Effective for taxable years beginning on or after January 1, 2002, the 15% limitation is removed.
  6. Corporations Allocating Their Net Income (Section .1506)
    A corporation required to allocate and apportion its net income or net loss under G.S. 105-130.4 may carry forward only a portion of its net economic loss. After the required adjustments for income not taxable in the next succeeding year have been made, the allocable portion of such determined net economic loss deduction is deducted from the total amount of income allocated to this State. For example, a corporation allocating 50% of its net income or loss to North Carolina in a particular year in which it sustains a total net economic loss of $1,000 may carry forward only $500 to a subsequent year.

    Where the allocating corporation earns nonbusiness income subject to direct allocation outside North Carolina in a year succeeding the loss-year, the portion of the directly allocated income used to offset the loss brought forward is determined by applying to such income the allocation percentage applicable to the succeeding year.
  7. Corporation Sustaining Loss Entitled to Deduction (Section .1507)
    In the case of a merger of a loss corporation and a profit corporation, premerger losses may be offset against postmerger profits only to the extent that the group of assets which was previously operated at a loss is operated at a profit after the merger. However, accounting records must show clearly the income and expenses attributable to such groups of assets. Good Will Distributors (Northern) Inc. v. Currie, Commissioner of Revenue (1959) 251 N. C. 120, 110 S. E. 2nd 880; Holly Farms Poultry Industries, Inc. v. Clayton, Commissioner of Revenue (1970) 9 N. C. App. 345, 176 S.E. 2nd 367; Fielderest Mills, Inc. v. Coble, (1976), 290 N. C. 504, 135 S.E. 2nd 205.
  8. Examples
    The following examples show the proper method of computing net economic losses and the correct procedure for carrying them forward as deductions.

    Example a: Corporation X, a North Carolina corporation, conducts its entire business in this State. The corporation had a net loss of ($10,000) in 1999 and net income of $20,000 in 2000. In each year, the corporation received $500 from U.S. government obligations and $500 from State of North Carolina bonds. Interest on North Carolina bonds and interest on U.S. obligations were deducted in computing State net income and net loss.
    Determination of Net Economic Loss
    Net loss for 1999   $ (10,000)
    Reduced by income not taxable:    

    U.S. Government interest

    $ 500  

    N.C. Bond interest

    500 1,000
    Net economic loss for 1999   $ (9,000)

    Computation of Net Economic Loss Deduction
    Net economic loss brought forward from 1999   $ (9,000)
    Reduced by income not taxable received in 2000:    

    U.S. Government interest

    $ 500  

    N.C. Bond interest

    500 1,000
    Net economic loss deduction in 2000   $ (8,000)

    Computation of 2000 Net Taxable Income
    Net income for 2000   $20,000

    Less: Net economic loss deduction (from above)

      (8,000)
    Net taxable income   $12,000

    Example b: Corporation Y is a North Carolina corporation engaged in the business of manufacturing and selling chemicals and related products within and without this State. Its business is directed or managed from its North Carolina offices; therefore its commercial domicile is in this State. The corporation had a net loss of ($22,500) in 1999 and net income of $21,500 in 2000.

    The arithmetical average of the apportionment factors of property, payroll and sales was 60% in 1999 and 70% in 2000.

    The corporation received nontaxable interest of $800 in 1999 and $600 in 2000 on U.S. government bonds.

    In determining net loss and net income in the above years, the corporation included the following income and deduction items:
    1. Contributions of $1,000 to North Carolina donees were deducted in each year. Included in this deduction for each year were fully deductible contributions of $500 to qualified educational institutions in North Carolina.
    2. Nonbusiness rental income, less related expenses, of $2,000 was received in each year on a building located outside North Carolina. (NOTE: Since the rental income was received on nonbusiness real property, it is allocated directly to the state in which the property was located.)
    3. A gain of $500 in 1999 and a loss of ($500) in 2000 was realized on the sale of U.S. government bonds. (NOTE: Since the commercial domicile of Corporation Y is in North Carolina, such nonbusiness gains or losses on intangible property are allocated directly to this State.)
    4. Nonbusiness dividend income of $1,000 (net nonbusiness dividend income) was received in each year. (NOTE: Since the commercial domicial of Corporation Y is in North Carolina, such net nonbusiness dividend income is allocated directly to this State.)
    5. Business dividend income of $3,000 was received in 2000 from Corporation A, a company in which Corporation Y owns more than 50% of the stock. (NOTE: Since the dividend income is business income, it would generally be included in apportionable income, but since Corporation Y owns more than 50% of Corporation A, the dividend is deductible in determining taxable income.)
    Computation of Net Economic Loss
    Net loss for 1999   $(22,500)

    Add: Contributions

      1,000
    Total   $(21,500)

    Less total nonbusiness income:

       


    Net rental income

    $ 2,000  

    Gain on bonds sold

    500  

    Nonbusiness dividends--net

    1,000 3,500
    Total business income (loss)   $(25,000)
         
    Average of apportionment factors - 60%
    Business income (loss) apportioned
    to North Carolina (60% of $25,000)
      $(15,000)

    Add nonbusiness income allocated directly to North Carolina:

       

    Gain on bonds sold

    $ 500  

    Nonbusiness dividends--net

    1,000 1,500
    Total   ($13,500)
    Less: Contributions to educational
    institutions located in NC
      500
    Total   ($14,000)
    Total (loss) allocated to North Carolina reduced by income not taxable:    

    U.S. Government interest (60% of $800)

    $ 480  

    Net rental income (60% of $2,000)

    1,200 1,680
    Net economic loss for 1999   $(12,320)

    Computation of Net Economic Loss Deduction
    Net economic loss brought forward from 1999   $(12,320)

    Reduced by income not taxable received in 2000:

       

    U.S. Government interest (70% of $600)

    $ 420  

    Dividend income from

       

    Company A (70% of $3,000)

    2,100  

    Net rental income (70% of $2,000)

    1,400 3,920

    Net economic loss deduction in 2000

      $(8,400)

    Computation of 2000 Net Taxable Income
    Net income for 2000   $21,500

    Add: Contributions

      1,000
    Total   $22,500
    Less total nonbusiness income:    

    Net rental income

    $2,000  

    Loss on bonds sold

    (500)  

    Nonbusiness dividends--net

    1,000 2,500
    Total business income   $20,000
         
    Average of apportionment factors -- 70%    
    Business income apportioned to North Carolina (70% of $20,000   $14,000
    Add nonbusiness income allocated directly to North Carolina:    

    Loss on bonds sold

    $(500)  

    Nonbusiness dividends--net

    1,000 500
    Total income allocated to North Carolina   $14,500
    Less: Net economic loss deduction from above   (8,400)
    Total   $6,100
    Less contributions to North Carolina donees:    

    Amount subject to 5% limitation (5% of $6,100)

    $305  

    Amount fully deductible to North Carolina educational institution

    500 $805
    Net taxable income -- 2000   $5,295

    Example c: Corporation Z, a Delaware corporation domesticated in North Carolina, is engaged in the business of manufacturing machinery within and without this State. Its commercial domicile is in New York. The corporation had a net loss of ($52,500) in 1999 and net income of $91,100 in 2000.

    The arithmetical average of the apportionment factors of property, payrolls and sales was 20% in 1999 and 25% in 2000.

    Listed below are income and deduction items included in the computation of net loss and net income.
    1. In each year, contributions of $1,000 to donees outside North Carolina were deducted. In 2000 contributions of $200 to North Carolina donees were also deducted.
    2. A loss of ($500) was realized in each year on the sale of corporate bonds acquired and held as an investment. (NOTE: Since the losses were nonbusiness losses, they are not included in apportionable business income.)
    3. Nonbusiness interest of $2,000 was received in each year on bonds acquired and held as an investment. (NOTE: Since this interest is nonbusiness income, it is not included in apportionable business income.)
    4. Nonbusiness dividends of $10,000 (net nonbusiness dividend income) were received in each year from Corporation A in which Corporation Z owned less than 50% of the stock. (NOTE: Although Corporation Z included the $10,000 in gross income, these dividends are nonbusiness income and as such are not included in apportionable business income.)
    5. Business dividends of $3,000 were received in 2000 from Corporation B in which Corporation Z owned more than 50% of the stock. (NOTE: Since the dividend income is business income, it would generally be included in apportionable income, but since Corporation Z owns more than 50% of Corporation B, the dividend is deductible in determining taxable income.)

    Computation of Net Economic Loss
    Net loss for 1999   $(52,500)

    Add: Contributions

      1,000
    Total   $(51,500)

    Less total nonbusiness income:

       

    Loss on bonds sold

    $(500)  

    Interest

    2,000  

    Nonbusiness dividends--net

    10,000 11,500
    Total business income (loss)   $(63,000)
         
    Average of apportionment factors-20%    
    Business income (loss) apportioned
    to North Carolina- 20% of $(63,000)
      $(12,600)

    Reduced by income not taxable:

       

    20% of interest of $2,000

    $ 400  

    20% of net dividends of $10,000

    2,000 2,400
    Net economic loss for 1999   $(10,200)

    Computation of Net Economic Loss Deduction
    Net economic loss brought forward from 1999   $(10,200)
    Reduced by income not taxable received in 2000    

    Nonbusiness interest (25% of $2,000)

    $500  
    Deductible dividends from Corporation B (25% of $3,000) 750  
    Nonbusiness dividends -- net (25% of $10,000) 2,500 3,750
    Net economic loss for 2000   $(6,450)

    Computation of 2000 Net Taxable Income
    Net income for 2000   $91,100

    Add: Contributions to donees located in North Carolina

      200
    Total   $91,300

    Less total nonbusiness income:

       

    Loss on bonds sold

    $(500)  

    Interest

    2,000  

    Nonbusiness dividends--net

    10,000 11,500

    Total business income

      $79,800
         

    Average of apportionment factors--25%

       

    Business income apportioned to North Carolina-(25% of $79,800)

      $19,950

    Less: Net economic loss deduction from above

      (6,450)
    Total income allocated to North Carolina   $13,500

    Less: Contributions to donees located in North Carolina

      200
    Net taxable income--2000   $13,300