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M. 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, any income taxable or nontaxable of the next succeeding
year before any portion of the loss may be carried forward
to a succeeding year. 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 from 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 post merger
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; Fieldcrest 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 2001 and net income of $20,000 in 2002. 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 2001 |
|
($10,000) |
| Reduced by income not taxable: |
|
|
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U. S. Government interest |
$ 500 |
|
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N.C. bond interest |
500 |
|
| |
|
|
1,000 |
| Net economic loss for 2001 |
|
($ 9,000) |
| Computation of Net Economic Loss Deduction |
| Net loss brought forward from 2001 |
|
($9,000) |
| Reduced by income not taxable received in
2002: |
|
|
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U. S. Government interest |
$ 500 |
|
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N.C. bond interest |
500 |
|
| |
|
|
1,000 |
| Net economic loss deduction in 2002 |
|
($ 8,000) |
| Computation of 2002 Net Taxable Income |
| Net income for 2002 |
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($20,000) |
| Less: Net economic loss deduction (from above)
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|
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|
|
8,000 |
| Net taxable income |
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($ 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 2001 and net income of $21,500 in 2002.
The arithmetical average of the apportionment factors of property,
payroll and sales was 60% in 2001 and 70% in 2002.
The corporation received nontaxable interest of $800 in 2001 and
$600 in 2002 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 2001 and a loss of ($500) in 2002 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.)
| Computation of Net Economic Loss |
| Net loss for 2001 |
|
($22,500) |
| Add: Contributions |
|
1,000 |
| Total |
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($21,500) |
| |
|
|
|
| Less total nonbusiness income: |
|
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Net rental income |
$2,000 |
|
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Gain on bonds sold |
500 |
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Net nonbusiness dividends |
1,000 |
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|
|
$ 3,500 |
| Total business income (loss) |
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($25,000) |
| |
|
|
|
| Apportionable to North Carolina -- 60%
|
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($15,000) |
| Add nonbusiness income allocated directly
to N C: |
|
|
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Gain on bonds sold |
$ 500 |
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Net nonbusiness dividends |
1,000 |
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$ 1,500 |
| Total |
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($13,500) |
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|
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| Less: Contributions to educational institutions
located in N.C. |
|
$ 500 |
| Total |
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($14,000) |
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| Less income not taxable in North Carolina: |
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U.S. Government interest (60% of $800)
|
$ 480 |
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Net rental income (60% of $2,000) |
1,200 |
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|
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$ 1,680 |
| Net economic loss for 2001 |
|
($12,320) |
| Computation of Net Economic Loss Deduction |
| Net economic loss brought forward from
2001 |
|
($12,320) |
| Reduced by nontaxable income received
in 2002: |
|
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U.S. Government interest (70% of $600) |
$ 420 |
|
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Net rental income (70% of $2,000) |
1,400 |
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$ 1,820 |
| Net economic loss deduction in 2002 |
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($10,500) |
| Computation of 2002 Net Taxable Income |
| Net income for 2002 |
|
$21,500 |
| Add: Contributions |
|
1,000 |
| Total |
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$22,500 |
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| Less total nonbusiness income: |
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Net rental income |
$2,000 |
|
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Loss on bonds sold |
( 500) |
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Net nonbusiness dividends |
1,000 |
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$ 2,500 |
| Total business income |
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$20,000 |
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|
|
| Apportionable to North Carolina --70%
|
|
$14,000 |
| Add nonbusiness income allocated directly
to N. C.: |
|
|
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Loss on bonds sold |
($ 500) |
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Net nonbusiness dividends |
1,000 |
|
| |
|
|
$ 500 |
| Total allocated to North Carolina |
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$14,500 |
| Less: Net economic loss deduction from
above |
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( 10,500) |
| Total |
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$ 6,100 |
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| Less contributions to North Carolina donees: |
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|
| Amount subject to 5% limitation (5% of
$4,000) |
$ 200 |
|
| Amount given to N. C. educational institution |
500 |
|
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|
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$ 700 |
| Net taxable income in 2002 |
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$ 3,300 |
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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 2001 and net income of $91,100 in 2002.
The arithmetical average of the apportionment factors of property,
payrolls and sales was 20% in 2001 and 25% in 2002.
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 2002 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 apportionble 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.
(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.)
| Computation of Net Economic Loss |
| Net loss for 2001 |
|
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($52,000) |
| Add: Contributions |
|
|
1,000 |
| Total |
|
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($51,500) |
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| Less total nonbusiness income: |
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Loss on bonds sold |
($ 500) |
|
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Interest |
2,000 |
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Net nonbusiness dividends |
10,000 |
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|
$11,500 |
| Total business income (loss) |
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($63,000) |
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|
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| Apportionable to North Carolina --
20% |
|
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($12,600) |
| Reduced by income not taxable: |
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Interest (20% of $2,000) |
$ 400 |
|
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Net dividends (20% of $10,000) |
2,000 |
|
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$2,400 |
|
| Net economic loss for 2001 |
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($10,200) |
| Computation of Net Economic Loss Deduction |
| Net economic loss brought forward
from 2001 |
|
($10,200) |
| Reduced by nontaxable income received
in 2002: |
|
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| Nonbusiness interest (25% of $2,000) |
$ 500 |
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| Net nonbusiness dividends (25% of
$10,000) |
2,500 |
|
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$ 3,000 |
| Net economic loss for 2002 |
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($ 7,200) |
| Computation of 2002 Net Taxable Income |
| Net income for 2002 |
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$91,100 |
| Add: Contributions to donees located
in N C |
|
200 |
| Total |
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$91,300 |
| Less total nonbusiness income: |
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Loss on bonds sold |
($ 500) |
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Interest |
2,000 |
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Net nonbusiness dividends |
10,000 |
|
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$11,500 |
| Total business income |
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$79,800 |
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| Apportionable to North Carolina --
25% |
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$19,950 |
| Less: Net economic loss deduction
from above |
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( 7,200) |
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| Total allocated to North Carolina |
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$12,750 |
| Less: Contributions to donees located
in North Carolina |
|
200 |
| Net taxable income for
2002 |
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$12,550 |
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