Good news! California has not suspended NOLs for 2013, and we now have an NOL carryback provision.
For taxable years beginning on or after January 1, 2013, a taxpayer will carry a California NOL back two years, or elect to carry the loss forward. The carryback amounts are limited to:
- 50% of NOLs incurred in the 2013 taxable year;
- 75% for NOLs incurred in the 2014 taxable year; and
- 100% for NOLs incurred in the 2015 or any subsequent taxable year.
Any excess loss, including any unused carryback portion is carried forward for 20 years.
Like federal law, the taxpayer must carry the loss back first and then forward unless the taxpayer makes a valid election to relinquish/waive the entire carryback period and carry the loss forward. The election must be made by the due date of the return, including extensions, for the year of the NOL. If the taxpayer filed the return without making the election, the taxpayer may still make the election on the Form FTB 8305V or FTB 3805Q within six months, excluding extensions, of the due date of the return. The election is irrevocable for that taxable year.
Suspended loss in carryback year
Although it may be a little too late, a taxpayer whose NOL was suspended in 2011 may be able to recoup tax by carrying back a 2013 loss. For the 2011 taxable year, NOLs were suspended for:
- Individuals, estates, and trusts with federal modified adjusted gross income (AGI) of $300,000 or more; and
- Corporations (and LLCs taxed as corporations) with pre-apportioned net income of $300,000 or more.
Because the NOL suspension for individuals was based on federal AGI (without regard to the taxpayer’s federal NOL), carrying a 2013 loss back will not free up a loss from a year prior to 2011. Regarding corporations, pre-apportioned income is defined as net income after California adjustments and before the application of apportionment and allocation provision. Accordingly, an NOL deduction would not be taken into account because an NOL is taken after apportionment and allocation. Therefore, an NOL carryback will not affect whether the taxpayer is subject to the suspension in the year of the carryback.
Nonconformity with federal
- Quick refund: Under Internal Revenue Service (IRS) procedures, a taxpayer can apply for a quick refund for tentative carryback adjustments made for an NOL. California does not conform.
- Interest paid: 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 for the taxable year from which the NOL arose. California law provides that interest is paid on overpayments of tax from the date of the overpayment to the date paid, less time to process the check or other form of payment. Unlike federal law, California has no interest rules specific to NOL carrybacks.
- Statute of limitations: For federal purposes, when a taxpayer generates an NOL in a current taxable year and carries that NOL back to a previously filed return with an open statute, the statute of limitations to assess additional tax for the previously filed taxable year is extended to the last date to assess additional tax for the taxable year that generated the NOL. California did not adopt the special statute of limitations rules that the IRS has for when an NOL carryback is used to amend a prior-year income or franchise tax return. Thus, the statute of limitations on the carryback year is not extended for California purposes.
Alternative Minimum Tax (AMT) NOLs
California conforms to Internal Revenue Code Section 55-59 (with exceptions), so the same election applies for AMT purposes. For AMT purposes, the NOL is limited to 90% of current AMT income. A taxpayer who elects to carry forward the regular tax NOL must also carry forward the AMT NOL.
For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).