T2-M1 NOL and Capital Losses

Question 1

what are NOL carryback and carryforward rules?

Answer 1

• NOL rule prior to 2018 (2017 and earlier):
  + NOLs can be carried back 2 years and carried forward 20 years
  + NOLs carryforwards can offset 100% of future taxable income (TI)
• NOL rule for 2018, 2019, and 2020:
  + NOLs for 2018, 2019, and 2020 can be carried back 5 years and carried forward forever
  + NOL carryforward can offset:
  a. 100% of TI for 2018, 2019, and 2020; and
  b. 80% of TI for 2021 and future years after deducting pre-2018 NOL carryforwards
• NOL rule for 2021 and into the future:
  + NOLs cannot be carried back but can be carried forward forever
  + can offset 80% of TI for 2021 future years after deducting pre-2018 NOL carryforwards

Question 2

what are other rules about NOLs?

Answer 2

• No charitable contribution is allowed in the year incurred NOL

Question 3

what are the limitations on NOL carryforward following an ownership change (section 382)?

Answer 3

• when a corp acquired a loss corp, the amount of TI that may be offset by the NOL of the loss corp arising before the ownership change is limited
• Congress enacted section 382 to prevent a corp with a large TI from:
  + purchasing a company with NOL carryforwards; and
  + using those NOLs to offset income
• section 382 loss limitations are triggered by an “ownership change.” when 1 or more “5% shareholders” increase their aggregate (total) ownership of the loss corp’s stock by more than 50% over the lowest stock % owned by those shareholders during testing period (3-year period ending on but include the date of the change in ownership)
• section 382 limitation = FMV of the loss corp’s stock (right before ownership change) x federal LT tax exempt rate (rate published by internal Revenue Bulletin)
• Unused NOLs are carryforward and increase the next year’s limitation amount

Question 4

what are taxation on capital losses?

Answer 4

• $3K deduction for net capital losses is available for individuals (not allowed to corps)
• Corps can only use capital losses to offset capital gains
• Capital losses are carried back 3 years and forward 5 years as STCL
• in calculation, do capital losses to offset capital gains first before other calcs