Alabama Administrative Code
Title 810 - ALABAMA DEPARTMENT OF REVENUE
Chapter 810-3-15.2 - NET OPERATING LOSS
Section 810-3-15.2-.01 - Net Operating Loss Carryback Or Carryover
Universal Citation: AL Admin Code R 810-3-15.2-.01
Current through Register Vol. 42, No. 11, August 30, 2024
(1) Computation of a Net Operating Loss (NOL).
(a) A net operating loss is the amount
by which deductions (after modifications) exceed gross income. A net operating
loss may result from losses incurred in a trade or business, from the sale of
assets used in a trade or business, or from personal casualties or thefts.
1. For the purpose of computing the amount of
an allowable net operating loss, certain items of income, expense or deduction
will be classified as "business" or "nonbusiness." The following is a partial
list of items regularly classified as business or nonbusiness:
(i) Business. Business income, expense and
deductions include, but are not limited to: salary and wages; income or loss
from a trade or business; gain or loss from sale of assets used in a trade or
business; losses on Internal Revenue Code § 1244 stock (up to the amount
of ordinary loss allowed for federal income tax purposes); rental income or
loss; income or loss from a partnership; income or loss from an Alabama S
corporation; income or loss from farming; employee moving expenses; employee
business expenses; and casualty and theft losses.
(ii) Nonbusiness. Nonbusiness income, expense
and deductions include, but are not limited to: medical expenses; taxes;
interest expense; charitable contributions; miscellaneous deductions other than
employee business expenses; gain from the sale of a personal residence to the
extent recognized in accordance with §
40-18-14,
Code of Ala. 1975; gain or loss from the sale of
assets not used in a trade or business (including distributive shares of gains
or losses from such assets held by a partnership or an Alabama S corporation);
interest and dividend income (including distributive shares of interest and
dividend income received by a partnership or an Alabama S corporation); losses
on Internal Revenue Code §1244 stock (in excess of the amount of ordinary
loss allowed for federal income tax purposes) federal income tax refunds or tax
paid; alimony received; taxable pension and annuities; income or loss from a
trust or estate; deductible contributions to IRA retirement plans; Keogh
retirement plans; employee benefit contributions paid by an employer; penalties
for early withdrawal of savings; alimony paid and disability income
exclusions.
2. In
computing the amount of a net operating loss allowable for a particular taxable
year, the following modifications must be made:
(i) no deduction may be taken for any net
operating loss carried over from another year,
(ii) no deduction is allowed for the personal
exemption or exemption for dependents allowed by §
40-18-19,
Code of Ala. 1975,
(iii) nonbusiness deductions, including the
federal income tax deduction, may not exceed nonbusiness income, and
(iv) the optional standard deduction, if
claimed, is considered a nonbusiness deduction and may not exceed nonbusiness
income.
(b)
Definitions. As used in this regulation, the following terms have the meanings
ascribed to them, unless the context clearly indicates otherwise:
1. "NOL" means "net operating
loss."
2. "Carryback" means an NOL
applied to a year prior to the year in which the NOL occurred.
3. "Carryover" means the excess NOL after a
portion of the NOL has been applied to a carryback or carryforward
year.
4. "Carryforward" means an
NOL applied to a year subsequent to the year in which the NOL
occurred.
5. "Intervening Year"
means a year between the earliest year to which an NOL can be carried back and
the year in which the NOL occurred.
6. "Loss Year" means the year in which an NOL
occurred.
(2) Application of an NOL Carryback.
(a) For loss
years beginning after December 31, 1997, an NOL may be carried back and
deducted from taxable income in each of the preceding two years or until
exhausted.
(b) NOL Carrybacks.
1. When an NOL is carried back to a prior
year, taxable income will be recomputed in such prior year as specified in
subparagraphs (i), (ii), and (iii) below.
(i)
If the NOL being carried back is equal to or greater than taxable income as
previously reported or last adjusted (including any deductions for NOLs carried
over or carried back to such year from any loss year prior to the current loss
year), taxable income will be reduced to zero. See paragraph (5) below for the
computation of any remaining NOL for carryover to a subsequent year. See
subparagraph 3 for refund procedures.
(ii) If the NOL being carried back is less
than taxable income as previously reported or last adjusted (including any
deductions for NOLs carried over or carried back to such year from any loss
year prior to the current loss year), taxable income for the carryback year is
reduced by the amount of the NOL.
(iii) The NOL carryback reduces adjusted
gross income, and therefore, will affect those deductions which are based on or
limited by a percentage of adjusted gross income.
(I) The limitation on contributions will be
reduced.
(II) The amount of medical
expenses exceeding 4% of adjusted gross income may increase.
(III) If the optional standard deduction is
elected, the amount will be computed by applying the appropriate percentage to
adjusted gross income after subtracting the NOL carryback.
2. Recomputation of Tax in a
Carryback Year. The appropriate rates for the carryback year will be applied to
the amount of taxable income after subtraction of the NOL deduction.
3. Refund Procedures.
(i) To apply an NOL carryback and to request
any refund due, complete Form NOL-85A and attach it to Form 40X (Amended
Alabama Individual Income Tax Return) for each year to which the carryback is
being applied.
(ii) Limitations on
Refund Claims. A claim for refund of tax based on an NOL carryback must be
filed within three (3) years, including extensions, from the due date of the
loss year return.
(I) If the taxpayer has an
NOL and fails to claim the NOL carryback within three years, including
extensions, from the due date of the loss year return, no refund will be made
based on the NOL carryback. The taxpayer will be allowed to carry any available
loss forward.
(II) After computing
the carryback and reducing the loss available by the taxable income and
required modifications for all of the carryback years, a loss may still be
available to be carried forward. If so, the remaining available loss may be
claimed in the first year following the loss year, providing the loss is
claimed when the return is filed for the carryforward year as described in
paragraph (4).
4. No deduction will be allowed in any
carryback year which has been closed by expiration of the statute of
limitations or by final assessment prior to the application of the
carryback.
(3) Election to Relinquish the Entire Carryback Period.
(a) A taxpayer may elect to
forego the carryback period of an NOL.
(b) If such an election is made, the NOL will
then be carried forward to the first available year following the loss year.
The carryforward period limitation of fifteen (15) years is not extended if an
election is made to forego the carryback period.
(c) For loss years beginning after December
31, 1997, the election to forgo the carryback period can be made in one of two
ways. The election can be made on or before the due date (with extensions) for
filing the income tax return for the loss year. If no election is made by the
due date of the loss year return, then the filing of the next year=s return by
the due date, including extensions, and claiming the loss on the return shall
be considered the taxpayer's election to forgo the carryback period. The
election, once made, is irrevocable.
(d) If a proper election to forego the
carryback period is not made, or not timely made, the NOL must be carried back
to the earliest year preceding the loss year in which the NOL may be utilized
(e.g., a 1998 NOL must be carried back to 1996). Any unused NOL may be carried
to the next earliest preceding year, in order.
(4) Application of an NOL Carryforward to a Year After the Loss Year.
(a) Eligible
Carryforward Years. An NOL may be carried forward to years subsequent to the
loss year in order of time or until exhausted, whichever occurs first; subject
to the following limitations:
1. To each of
the fifteen tax years following the loss year.
2. No deduction will be allowed in any
carryforward year which has been closed by expiration of the statute of
limitations or by final assessment prior to the application of the
carryforward.
(b)
Computation of Taxable Income.
1. If the NOL
being carried forward is equal to or greater than taxable income, taxable
income will be reduced to zero. Taxable income is computed without considering
the current NOL carryover to be applied, but will reflect any prior carryovers
which have been applied. See paragraph (5) below for the computation of any
remaining NOL for carryover to a subsequent year.
2. If the NOL being carried forward is less
than taxable income (computed without considering the NOL deduction to be
applied), adjusted gross income will be reduced (but not below zero) by the
amount of the NOL carryforward.
(i) The NOL
carryforward reduces adjusted gross income, and therefore, will affect those
deductions which are based on or limited by a percentage of adjusted gross
income.
(I) The limitation on contributions
will be reduced.
(II) The amount of
medical expenses exceeding 4% of adjusted gross income may increase.
(III) If the optional standard deduction is
elected, the amount will be computed by applying the appropriate percentage to
adjusted gross income after subtracting the NOL carryforward.
(5) Computation of any Remaining NOL Carryover After Application of an NOL.
(a) In
order to determine the amount of an NOL available for carryover, certain
adjustments must be made to the taxable income for the year in which the
deduction was taken. The amount by which the NOL will be reduced is called
"modified taxable income."
(b) The
modifications required by law provide that no deduction is allowed for:
1. the personal exemption provided in §
40-18-19(a)(6),
and
2. the deduction for dependents
provided in §
40-18-19(a)(7).
(c) These modifications are
applied after all prior adjustments or modifications have been made to adjusted
gross income and/or taxable income in the year to which the NOL is being
applied.
1. If a prior NOL carryback or
carryover was fully absorbed in the year, and a subsequent NOL is carried to
the year and cannot be fully absorbed, the modifications required in
subparagraph (a) above would be computed after taxable income has been
recomputed for the year.
2. If the
subsequent NOL can be fully absorbed, after taxable income has been recomputed
for the prior NOL, taxable income for the year must be recomputed, with
adjusted gross income reduced again for the subsequent NOL.
(6) Special Rules.
(a) Joint Returns.
1. In general, in the case of a husband and
wife who file a joint income tax return for any taxable year in which an NOL
occurs, the loss is to be computed on the basis of the combined income and
deductions of both spouses, and the modifications required are to be computed
as if the combined income were the income of one individual. However, if
separate returns were filed for any of the carryback years, the NOL must be
computed as if separate returns were being filed in the joint loss
year.
2. Special rules are
necessary when there is a change in the status of the spouses due to marriage,
divorce or death.
(i) An NOL sustained after
or prior to a marriage cannot be used to reduce the taxable income of a former
or future spouse, even though a joint return was filed for the carryback and/or
carryforward year. The NOL can only be applied to the separate income of the
spouse which incurred the loss.
(ii) If there is a change in marital status
due to the death of a spouse:
(I) and in a
succeeding year the survivor sustains an NOL, the loss may be carried back only
to that portion of the income reported on a joint return previously filed with
the decedent which is allocated to the survivor.
(II) and a joint return is filed for the year
of death of the spouse and an NOL was sustained -
I. the loss may be carried back to a year in
which the decedent filed a joint return with the surviving spouse,
and/or
II. the loss allocated to
the deceased spouse may be carried back to a year in which the decedent filed a
separate return.
A. Any NOL allocated to a
deceased spouse not utilized in subsentence II, above, may not be carried
forward.
(b) Reduction for Allowable NOL, Whether or
Not Claimed.
1. An NOL carryback or carryover
will be reduced by the amount available for use, whether used or not. For
instance, if a taxpayer neglects to claim an NOL carryback within the
prescribed time limit, the amount of loss available for carryover to other
years will be reduced by the amount that could have been carried back but was
not claimed.
2. If the loss was
available for use prior to the final assessment, the remaining NOL must be
reduced by the amount that was available for use before the final
assessment.
(c) NOLs of
Nonresidents.
1. In general, nonresidents are
allowed the same deduction for NOLs as the deduction allowed to residents,
except that the loss must be attributable to sources in Alabama, and is applied
to income attributed to Alabama. The computation of the loss, as applied to
Alabama source income, is made as provided in paragraph (1) above. The
deduction for a carryback is computed as provided in paragraph (2) above. The
deduction for a carryover is computed as provided in paragraph (4) above. The
computation of any remaining carryover of an NOL that cannot be fully absorbed
is computed as provided in paragraph (5) above.
2. A number of deductions allowed
nonresidents, including the personal exemption and exemption for dependents,
are limited based on the ratio of income from Alabama sources to income from
all sources. When an NOL is fully absorbed, these deductions must be recomputed
based on the changes to Alabama income and total income after the NOL is
applied.
Author: Ann F. Winborne, CPA
Statutory Authority: Code of Ala. 1975, §§ 40-2A-7(a)(5), 40-18-15.3.
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