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State of California Franchise Tax Board

Tax News
Net Operating Loss Carryback, New for 2013

If you’re like most business owners, you won’t see a profit in your first year of operation. As your business grows, you may face one or more years in which your business’ expenses exceed its income. In other words, the business may have a loss, which may translate into a Net Operating Loss (NOL) deduction. How this loss can be used to offset other income depends upon how your business is structured.

California law allows businesses, individuals, estates, trusts,[1] and exempt organization to use Net Operating Loss carryovers. California now has NOL carry backs.

Net Operating Loss Carryback

California now requires NOLs generated in a taxable years beginning on or after January 1, 2013, to be carried back two preceding taxable years. The law requires the "loss year" NOL amount back to the second taxable year before the loss year, and then any excess is back to the first preceding taxable year. Any loss not applied in the two preceding years is carried forward.

At first, the allowable NOL carryback percentage will vary. For an NOL incurred in a taxable year beginning on or after:

  • January 1, 2013, and before January 1, 2014, the carryback amount may not exceed 50 percent of the NOL.
  • January 1, 2014, and before January 1, 2015, the carryback amount may not exceed 75 percent of the NOL.
  • January 1, 2015, and after the carryback amount is 100 percent of the NOL.

Background

California law generally conforms to IRC Section 172, with exceptions (see R&TC Sections 17201 and 17276.20 [former R&TC Section 17276], and R&TC Section 24416.20 [former R&TC Section 24416]). One notable exception is the modification to IRC Section 172(b)(1), relating to years to which the loss may be carried. NOL carry backs are not allowed for any NOL attributable to taxable years beginning before January 1, 2013.

The NOL carryback computation will depend upon the business’ structure. Since California law generally incorporates federal law, the federal regulations will apply to the extent they do not conflict with California’s modifications.

Corporations will compute their NOL carryback in Part III of California Form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations - Corporations. For more information, see the instructions for California Form FTB 3805Q.

Your individual, estate, and trust clients will compute their NOL carryback in Part IV of California Form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Individuals, Estates, and Trusts.

How to Amend Prior Year Tax Returns

Corporation and Exempt Organization

Corporations and exempt organizations may claim an NOL carryback by amending the 2011 and/or 2012 tax return using Form 100X, Amended Corporation Franchise or Income Tax Return, or California Form 109, California Exempt Organization Business Income Tax Return.

Corporations and exempt organizations may claim the NOL as a carryback in any of the previous two years. Corporations and exempt organizations must first file the applicable 2013 tax return and attach the completed 2013 California Form FTB 3805Q to the tax return. After the 2013 tax return is filed, corporations and exempt organization may file the amended return for 2011 and/or 2012 to claim the NOL carryback deduction.

Corporations use Form 100X to amend their tax returns and provide the following explanation on Form 100X, Part V, line 2, Explanation of Changes: "2013 NOL carryback deduction."

Exempt organizations use California Form 109, to amend their tax returns by marking the Amended check box and attaching a statement with the following explanation: "2013 NOL carryback deduction."

Do not attach the 2013 California Form FTB 3805Q to the 2011 or 2012 amended tax return. Attaching California Form FTB 3805Q may delay processing of the amended tax return.

Individuals, Estates, and Trusts

Individuals, estates, and trusts may claim the NOL carryback by amending the 2011 and/or 2012 tax return using California Form 540X, Amended Individual Income Tax Return, or Form 541, California Fiduciary Income Tax Return.

Individuals, estates, and trusts may claim the NOL as a carryback in the previous two years. The individuals, estates, and trusts must first file the applicable 2013 tax return and attach the completed 2013 California Form FTB 3805V to the tax return. After the 2013 tax return is filed, individuals, estates, and trusts may file the amended return for 2011 and/or 2012 to claim the NOL carryback deduction.

Individuals use Form 540X to amended their tax returns and provide the following explanation on Form 540X, Part II, Explanation of Changes, line 5: "2013 NOL carryback deduction."

Estates and trust use Form 541 to amend their tax returns by marking the "Amended" check box and attaching a statement with the following explanation: "2013 NOL carryback deduction."

Do not attach the 2013 California Form FTB 3805V to the 2011 or 2012 amended tax return. Attaching California Form FTB 3805V may delay processing of the amended tax return.

Election to Waive NOL Carryback

Any taxpayer entitled to a carryback period pursuant to IRC Section 172(b)(3) may elect to relinquish/waive the entire carryback period with respect to an NOL incurred in the 2013 taxable year. By making the election, the taxpayer is electing to carry an NOL forward instead of carrying it back in the previous two years. Once made, the election is irrevocable for that taxable year.

Corporations

To make the election to relinquish/waive the entire carryback period, check the box in Part I under Election to Waive Carryback, of California Form FTB 3805Q and attach California Form FTB 3805Q to the tax return. For more information, see the instructions for California Form FTB 3805Q.

If the corporation filed the tax return on time without making the election, the corporation can still make the election on the California Form FTB 3805Q and attach it to the amended tax return filed within seven months of the due date of the tax return (excluding extensions). Once made, the election shall be irrevocable for that taxable year.

Individuals, Estates, and Trusts

To make the election to relinquish/waive the entire carryback period, check the box in Part I under Section C – Election to Waive Carryback, of California Form FTB 3805V, and attach FTB 3805V to the tax return. The election shall be made by the due date (including extensions of time) for filing the taxpayer’s tax return for the taxable year of the NOL for which the election is to be in effect.

If the individual, estate, and trust filed the tax return on time without making the election, the taxpayer can still make the election on the FTB 3805V and attach it to the amended tax return filed within six months of the due date of the tax return (excluding extensions). Once made, the election shall be irrevocable for such taxable year.

For more information regarding the NOL carryback, see FTB Legal Ruling 2011-04, September 23, 2011. In addition to guidance on the Suspension of Net Operating Loss Deductions – Extension of Carryover Periods, this ruling includes guidance on California’s NOL carryback provisions.

[1]For an individual to have a NOL the loss must generally be caused by deductions from specific types of activities, losses from a business is the most common reason an individual would have an NOL, for more information see IRS’s publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.

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