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N. Net Economic Loss Carry-Over (G.S. 105-130.8)
- 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:
- 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.
- 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.
- 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:
- For North Carolina tax purposes, the loss must be a net economic
loss rather than a net operating loss.
- 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.
- 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.
- 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)
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.)
- 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.)
- 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.)
- 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:
|
|
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Gain on bonds sold
|
$ 500 |
|
Nonbusiness dividends--net
|
1,000 |
1,500 |
| Total |
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($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: |
|
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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:
|
|
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U.S. Government interest (70% of $600)
|
$ 420 |
|
Dividend income from
|
|
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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
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|
1,000 |
| Total |
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$22,500 |
| Less total nonbusiness income: |
|
|
Net rental income
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$2,000 |
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Loss on bonds sold
|
(500) |
|
Nonbusiness dividends--net
|
1,000 |
2,500 |
| Total business income |
|
$20,000 |
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|
| Average of apportionment factors -- 70% |
|
|
| Business income apportioned to North Carolina (70% of $20,000 |
|
$14,000 |
| Add nonbusiness income allocated directly to North Carolina: |
|
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Loss on bonds sold
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$(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 |
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$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.
- 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.
- 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.)
- 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.)
- 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.)
- 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 |
|
$(52,500) |
Add: Contributions
|
|
1,000 |
| Total |
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$(51,500) |
Less total nonbusiness income:
|
|
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Loss on bonds sold
|
$(500) |
|
Interest
|
2,000 |
|
Nonbusiness dividends--net
|
10,000 |
11,500 |
| Total business income (loss) |
|
$(63,000) |
| |
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|
| Average of apportionment factors-20% |
|
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Business income (loss) apportioned
to North Carolina- 20% of $(63,000) |
|
$(12,600) |
Reduced by income not taxable:
|
|
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20% of interest of $2,000
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$ 400 |
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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 |
|
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Nonbusiness interest (25% of $2,000)
|
$500 |
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| 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 |
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$91,100 |
Add: Contributions to donees located in North Carolina
|
|
200 |
| Total |
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$91,300 |
Less total nonbusiness income:
|
|
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Loss on bonds sold
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$(500) |
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Interest
|
2,000 |
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Nonbusiness dividends--net
|
10,000 |
11,500 |
Total business income
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$79,800 |
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Average of apportionment factors--25%
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Business income apportioned to North Carolina-(25% of $79,800)
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$19,950 |
Less: Net economic loss deduction from above
|
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(6,450) |
| Total income allocated to North Carolina |
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$13,500 |
Less: Contributions to donees located in North Carolina
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|
200 |
| Net taxable income--2000 |
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$13,300 |
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