Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. However, the following special provisions apply only to corporations.taxmap/pubs/p542-007.htm#TXMP29db3295
When you go into business, treat all costs you incur to get your business started as capital expenses. See Capital Expenses in chapter 1 of Publication 535 for a discussion of how to treat these costs if you do not go into business.
However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Any cost not deducted can be amortized.
Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs are the direct costs of creating the corporation.
For more information on deducting or amortizing start-up and organizational costs, see the Instructions for Forms 1120 and 1120-A and chapters 8 and 9 of Publication 535.taxmap/pubs/p542-007.htm#TXMP040208cd
A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. These rules also deny the deduction of losses on the sale or exchange of property between related persons.taxmap/pubs/p542-007.htm#TXMP29308c67
For purposes of this rule, the following persons are related to a corporation.
- Another corporation that is a member of the same controlled group as defined in section 267(f) of the Internal Revenue Code.
- An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation.
- A trust fiduciary when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation.
- An S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation.
- A partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership.
- Any employee-owner if the corporation is a personal service corporation (defined earlier), regardless of the amount of stock owned by the employee-owner.
To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply.
- Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries.
- An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
- Any individual owning (other than by applying rule (2)) any stock in a corporation is treated as owning the stock owned directly or indirectly by that individual's partner.
- To apply rule (1), (2), or (3), stock constructively owned by a person under rule (1) is treated as actually owned by that person. But stock constructively owned by an individual under rule (2) or (3) is not treated as actually owned by the individual for applying either rule (2) or (3) to make another person the constructive owner of that stock.
Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests.taxmap/pubs/p542-007.htm#TXMP021d5f71
The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions.taxmap/pubs/p542-007.htm#TXMP6b9fbb57
For more information about the related person rules, see Publication 544.taxmap/pubs/p542-007.htm#TXMP68c8019a
A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel.
A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. For more information regarding the election, see Form 8902.taxmap/pubs/p542-007.htm#TXMP798c555e
A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed into service after August 8, 2005, and before January 1, 2012. The deduction is allowed the year the property is placed in service.
A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest.
For more information see section 179C of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP3af01c72
A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA).
A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest.
For more information, see sections 45H and 179B of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP5e8a8f63
A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service after December 31, 2005, and before January 1, 2008. In order to qualify for the deduction:
- The costs must be associated with depreciable or amortizable property in a Standard 90.1-2001 domestic building;
- The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and
- The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50%.
The deduction is limited to $1.80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. The corporation must reduce the basis of any property by any deduction taken. The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan.
For more information see section 179D of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP0342d132
A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. These items are known as corporate preference items and they include the following.
- Gain on the disposition of section 1250 property. For more information, see Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544.
- Percentage depletion for iron ore and coal (including lignite). For more information, see Mines and Geothermal Depositsunder Mineral Property in chapter 10 of Publication 535.
- Amortization of pollution control facilities. For more information, see Pollution Control Facilities in chapter 9 of Publication 535 and section 291(a)(5) of the Internal Revenue Code.
- Mineral exploration and development costs. For more information, see Exploration Costs and Development Costsin chapter 8 of Publication 535.
For more information on corporate preference items, see section 291 of the Internal Revenue Code.
A corporation can deduct a percentage of certain dividends received during its tax year. This section discusses the general rules that apply. For more information, see the instructions for Forms 1120 and 1120-A.taxmap/pubs/p542-007.htm#TXMP7ae3251b
A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received.taxmap/pubs/p542-007.htm#TXMP26b9684b
Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns.taxmap/pubs/p542-007.htm#TXMP16d774bf
Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations.taxmap/pubs/p542-007.htm#TXMP073376ba
Regulated investment company dividends received are subject to certain limits. Capital gain dividends received from a regulated investment company do not qualify for the deduction. For more information, see section 854 of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP2d206267
A corporation can make a one-time election to deduct 85% of the dividends received from a controlled foreign corporation. The corporation may make the election for either its last tax year that begins before October 22, 2004, or its first tax year that begins during the one-year period beginning on October 22, 2004. The corporation makes the election by completing and attaching Form 8895, One-Time Dividends Received Deduction for Certain Cash Dividends from Controlled Foreign Corporations, to its return by the due date (including extensions). This deduction only applies to dividends included in gross income. Form more information on making this election and figuring the deduction, see Form 8895.taxmap/pubs/p542-007.htm#TXMP22901238
Corporations cannot take a deduction for dividends received from the following entities.
- A real estate investment trust (REIT).
- A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year.
- A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Ex-dividend means the holder has no rights to the dividend.
- A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 360 days.
- Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. They do not qualify for this deduction.taxmap/pubs/p542-007.htm#TXMP66cc653b
The total deduction for dividends received or accrued is generally limited (in the following order) to:
- 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then
- 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations).
For exceptions, see Schedule C on Form 1120 and the Instructions for Forms 1120 and 1120-A.
In figuring the limit, determine taxable income without the following items.
- The net operating loss deduction.
- The domestic production activities deduction.
- The deduction for dividends received.
- Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below).
- Any capital loss carryback to the tax year.
If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit.taxmap/pubs/p542-007.htm#TXMP2c124e44
A corporation loses $25,000 from operations. It receives $100,000 in dividends from a 20%-owned corporation. Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Therefore, the 80% of taxable income limit does not apply. The corporation can deduct the full $80,000.taxmap/pubs/p542-007.htm#TXMP7292e222
Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Its taxable income is $85,000 before the deduction for dividends received. After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%).taxmap/pubs/p542-007.htm#TXMP61f0123c
If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. The nontaxed part is any dividends-received deduction allowable for the dividends.taxmap/pubs/p542-007.htm#TXMP223c918e
An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. The percentages are:
- 5% for stock preferred as to dividends, or
- 10% for other stock.
Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock.
Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock.
Disqualified preferred stock is any stock preferred as to dividends if any of the following apply.
- The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future.
- The issue price of the stock exceeds its liquidation rights or stated redemption price.
- The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock.
These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock.taxmap/pubs/p542-007.htm#TXMP7210ab1b
For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP32fc9003taxmap/pubs/p542-007.htm#TXMP331ed3ea
If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest.
A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following:
- A loan in exchange for a note that requires payment of interest at the applicable federal rate, and
- An additional payment in an amount equal to the forgone interest.
Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction.
For any period, forgone interest is equal to:
- The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus
- Any interest actually payable on the loan for the period.
See Below-Market Loans in chapter 5 of Publication 535 for more information.taxmap/pubs/p542-007.htm#TXMP54db6639
A corporation can claim a limited deduction for charitable contributions made in cash or other property. The contribution is deductible if made to, or for the use of, a qualified organization. For more information on qualified organizations, see Publication 526, Charitable Contributions, and Publication 78, Cumulative List of Organizations.
You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual.
A corporation using the cash method of accounting deducts contributions in the tax year paid.taxmap/pubs/p542-007.htm#TXMP539c0886
A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Make the choice by reporting the contribution on the corporation's return for the tax year. A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. The declaration must include the date the resolution was adopted.taxmap/pubs/p542-007.htm#TXMP3f31f576
A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure taxable income for this purpose without the following.
- The deduction for charitable contributions.
- The dividends-received deduction (for example line 29b of the 2006 Form 1120).
- The deduction allowed under section 249 of the Internal Revenue Code.
- The domestic production activities deduction.
- Any net operating loss carryback to the tax year.
- Any capital loss carryback to the tax year.
You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. You lose any excess not used within that period. For example, if a corporation has a carryover of excess contributions paid in 2005 and it does not use all the excess on its return for 2006, it can carry the rest over to 2007, 2008, 2009, and 2010. Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover.taxmap/pubs/p542-007.htm#TXMP351ad166
Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Keep the acknowledgement with other corporate records. Do not attach the acknowledgement to the return.taxmap/pubs/p542-007.htm#TXMP76c50332
If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. In addition the corporation should keep a record of:
- The approximate date and manner of acquisition of the donated property and
- The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution.
Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return.
A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work.
See Form 8283 for more information.taxmap/pubs/p542-007.htm#TXMP3caf3393
If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. For more information, see section 170(h) of the Internal Revenue Code.taxmap/pubs/p542-007.htm#TXMP0cc1cc15
A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. The deduction is limited to the gross proceeds from the sale of the vehicle, if it is sold without any intervening use or material improvement by the donee organization. An acknowledgement from the donee organization for deductions claimed in excess of $500 must be attached to the corporation's return. The acknowledgement must include the vehicle identification number or similar number, gross proceeds from the sale of the vehicle, and a statement that the deductible amount cannot exceed the gross proceeds from the sale. For more information, see Publication 526.taxmap/pubs/p542-007.htm#TXMP4bf0153e
For a charitable contribution of property, the corporation must reduce the contribution by the sum of:
- The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
- For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.
The reduction for the long-term capital gain applies to:
- Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption;
- Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and
- Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property.
A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. This deduction may be allowed for certain contributions of:
- Inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants.
- Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science.
- Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States.
Special provisions apply for charitable contributions made for the Hurricane Katrina, Rita, or Wilma relief effort. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, and Publication 526.taxmap/pubs/p542-007.htm#TXMP4da94361
Contributions made to an organization that conducts lobbying activities are not deductible if:
- The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
- The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.
For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526.taxmap/pubs/p542-007.htm#TXMP7f82105a
A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years.
A capital loss is carried to other years in the following order.
- 3 years prior to the loss year.
- 2 years prior to the loss year.
- 1 year prior to the loss year.
- Any loss remaining is carried forward for 5 years.
When you carry a net capital loss to another tax year, treat it as a short-term loss. It does not retain its original identity as long term or short term.
A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. The corporation treats this $6,000 as a short-term loss when carried back or forward.
The corporation carries the $6,000 short-term loss back 3 years. In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. It subtracts the $6,000 short-term loss first from the net short-term gain. This results in a net capital gain for year 1 of $7,000. This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000.taxmap/pubs/p542-007.htm#TXMP0a386014
A corporation may not carry a capital loss from, or to, a year for which it is an S corporation.taxmap/pubs/p542-007.htm#TXMP7b8b7c20
When carrying a capital loss from one year to another, the following rules apply.
- When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. In other words, you can carry capital losses only to years that would otherwise have a total net capital gain.
- If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.
- You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.
When you carry back a capital loss to an earlier tax year, refigure your tax for that year. If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return, to apply for a refund.taxmap/pubs/p542-007.htm#TXMP7ea5b89c
A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss.taxmap/pubs/p542-007.htm#TXMP4a9fbce4
If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. The corporation must file the Form 1120X within 3 years of the due date, including extensions, for filing the return for the year in which it sustains the capital loss.taxmap/pubs/p542-007.htm#TXMP61d8aa8c
A corporation generally figures and deducts a net operating loss (NOL) the same way an individual, estate, or trust does. The same 2-year carryback and up to 20-year carryforward periods apply, and the same sequence applies when the corporation carries two or more NOLs to the same year. For more information on these general rules, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
A corporation's NOL generally differs from individual, estate, and trust NOLs in the following ways.
- A corporation can take different deductions when figuring an NOL.
- A corporation must make different modifications to its taxable income in the carryback or carryforward year when figuring how much of the NOL is used and how much is carried over to the next year.
- A corporation uses different forms when claiming an NOL deduction.
The following discussions explain these differences.taxmap/pubs/p542-007.htm#TXMP1643aa76
A corporation figures an NOL in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than its gross income, the corporation has an NOL.
However, the following rules for figuring the NOL apply.
- A corporation cannot increase its current year NOL by carrybacks or carryovers from other years.
- A corporation cannot use the domestic production activities deduction to create or increase its current year NOL, including any carryback or carryover.
- A corporation can take the deduction for dividends received, explained later, without regard to the aggregate limits (based on taxable income) that normally apply.
- A corporation can figure the deduction for dividends paid on certain preferred stock of public utilities without limiting it to its taxable income for the year.
The corporation's deduction for dividends received from domestic corporations is generally subject to an aggregate limit of 70% or 80% of taxable income. However, if a corporation has an NOL for a tax year, the limit based on taxable income does not apply. In determining if a corporation has an NOL, the corporation figures the dividends-received deduction without regard to the 70% or 80% of taxable income limit.
See Dividends-Received Deduction under Income, Deductions, and Special Provisions, earlier, for an example.taxmap/pubs/p542-007.htm#TXMP03cdd197
Generally, a corporation must carry an NOL back 2 years prior to the year the NOL is generated, if the NOL is not used in the prior 2 years the remaining NOL can be carried forward for up to 20 years after the tax year in which the NOL was generated.
A corporation can make an election to waive the 2 year carryback period and use only the 20 year carryforward period. To make the election attach a statement to the original return filed by the due date (including extensions) for the NOL year.taxmap/pubs/p542-007.htm#TXMP1291e14a
The following rules apply.
- If a corporation carries back the NOL, it can use either Form 1120X or Form 1139. A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the corporation's NOL year, but it must file Form 1139 no later than 1 year after the year it sustains the NOL.
- If the corporation does not file Form 1139, it must file Form 1120X within 3 years of the due date, plus extensions, for filing the return for the year in which it sustains the NOL.
- A personal service corporation may not carryback an NOL to or from any tax year in which a section 444 election to have a tax year other than a required tax year applies.
- Certain electric utility companies may elect a 5 year carryback period for NOLs arising in tax years 2003, 2004, and 2005. The NOL carryback amount is limited to 20% of the total capital expenditures for electric transmission property and pollution control facilities. The election may be made during any tax year ending after December 31, 2005, and before January 1, 2009.
- A corporation can elect to treat a casualty loss arising in tax years ending after August 27, 2005, from the loss of public utility property used predominantly in a rate-regulated trade or business as a specified liability loss treated as a separate NOL subject to a 10 year carryback period. The loss must be the result of Hurricane Katrina. For more information see the Instructions for Form 1139.
If a corporation carries forward its NOL, it enters the carryover on Schedule K, Form 1120, line 12. It also enters the deduction for the carryover (but not more than the corporation's taxable income after special deductions) on line 29(a) of Form 1120 or line 25(a) of Form 1120-A.taxmap/pubs/p542-007.htm#TXMP1c623e21
If a corporation expects to have an NOL in its current year, it can automatically extend the time for paying all or part of its income tax for the immediately preceding year. It does this by filing Form 1138. It must explain on the form why it expects the loss.
The payment of tax that may be postponed cannot exceed the expected overpayment from the carryback of the NOL.taxmap/pubs/p542-007.htm#TXMP0d14d218
The extension is in effect until the end of the month in which the return for the NOL year is due (including extensions).
If the corporation files Form 1139 before this date, the extension will continue until the date the IRS notifies the corporation that its Form 1139 is allowed or disallowed in whole or in part.taxmap/pubs/p542-007.htm#TXMP51b43e73
If the NOL available for a carryback or carryforward year is greater than the taxable income for that year, the corporation must modify its taxable income to figure how much of the NOL it will use up in that year and how much it can carry over to the next tax year.
Its carryover is the excess of the available NOL over its modified taxable income for the carryback or carryforward year.taxmap/pubs/p542-007.htm#TXMP4a72628b
A corporation figures its modified taxable income the same way it figures its taxable income, with the following exceptions.
- It can deduct NOLs only from years before the NOL year whose carryover is being figured.
- The corporation must figure its deduction for charitable contributions without considering any NOL carrybacks.
The modified taxable income for any year cannot be less than zero.
Modified taxable income is used only to figure how much of an NOL the corporation uses up in the carryback or carryforward year and how much it carries to the next year. It is not used to fill out the corporation's tax return or figure its tax.taxmap/pubs/p542-007.htm#TXMP1b937c7a
A loss corporation (one with cumulative losses) that has an ownership change is limited on the taxable income it can offset by NOL carryforwards arising before the date of the ownership change. This limit applies to any year ending after the change of ownership.
See sections 381 through 384, and 269 of the Internal Revenue Code and the related regulations for more information about the limits on corporate NOL carryovers and corporate ownership changes.taxmap/pubs/p542-007.htm#TXMP12f0dd94
The at-risk rules limit your losses from most activities to your amount at risk in the activity. The at-risk limits apply to certain closely held corporations (other than S corporations).
The amount at risk generally equals:
- The money and the adjusted basis of property contributed by the taxpayer to the activity, and
- The money borrowed for the activity.
For the at-risk rules, a corporation is a closely held corporation if, at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned directly or indirectly by, or for, five or fewer individuals.
To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.
- Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered owned proportionately by its shareholders, partners, or beneficiaries.
- An individual is considered to own the stock owned, directly or indirectly, by or for his or her family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
- If a person holds an option to buy stock, he or she is considered to be the owner of that stock.
- When applying rule (1) or (2), stock considered owned by a person under rule (1) or (3) is treated as actually owned by that person. Stock considered owned by an individual under rule (2) is not treated as owned by the individual for again applying rule (2) to consider another the owner of that stock.
- Stock that may be considered owned by an individual under either rule (2) or (3) is considered owned by the individual under rule (3).
For more information on the at-risk limits, see Publication 925, Passive Activity and At-Risk Rules.taxmap/pubs/p542-007.htm#TXMP4d972946
The passive activity rules generally limit your losses from passive activities to your passive activity income. Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate during the tax year, or you have a rental activity.
The passive activity rules apply to personal service corporations and closely held corporations other than S corporations.
Corporations subject to the passive activity limitations must complete Form 8810, Corporate Passive Activity Loss and Credit Limitations. For more information on the passive activity limits, see the Instructions for Form 8810 and Publication 925.