Publication 542
taxmap/pubs/p542-007.htm#TXMP5e492218Rules 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#TXMP29db3295When 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#TXMP040208cdA 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#TXMP29308c67For 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#TXMP021d5f71The disallowance of losses from the sale or exchange of property
between related persons does not apply to liquidating distributions.
taxmap/pubs/p542-007.htm#TXMP6b9fbb57For more information about the related person rules, see Publication
544.
taxmap/pubs/p542-007.htm#TXMP68c8019aA 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#TXMP798c555eA 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#TXMP3af01c72A 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#TXMP5e8a8f63A 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#TXMP0342d132A 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#TXMP7ae3251bA 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#TXMP26b9684bDetermine 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#TXMP16d774bfSmall business investment companies can deduct 100% of the dividends
received from taxable domestic corporations.
taxmap/pubs/p542-007.htm#TXMP073376baRegulated 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#TXMP2d206267A 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#TXMP22901238Corporations 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#TXMP66cc653bThe 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#TXMP2c124e44Example 1.
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#TXMP7292e222Example 2.
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#TXMP61f0123cIf 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#TXMP223c918eAn 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#TXMP7210ab1bFor more information on extraordinary dividends, see section
1059 of the Internal Revenue Code.
taxmap/pubs/p542-007.htm#TXMP32fc9003taxmap/pubs/p542-007.htm#TXMP331ed3eaIf 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#TXMP54db6639A 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.
Note.You cannot take a deduction if any of the net earnings of an
organization receiving contributions benefit any private shareholder or
individual.
taxmap/pubs/p542-007.htm#TXMP5792e936A corporation using the cash method of accounting deducts contributions
in the tax year paid.
taxmap/pubs/p542-007.htm#TXMP539c0886A 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#TXMP3f31f576A 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#TXMP351ad166Generally, 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#TXMP76c50332If 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#TXMP3caf3393If 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#TXMP0cc1cc15A 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#TXMP4bf0153eFor 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#TXMP4da94361Contributions 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#TXMP7f82105aA 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.
Example.
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#TXMP0a386014A corporation may not carry a capital loss from, or to, a year
for which it is an S corporation.
taxmap/pubs/p542-007.htm#TXMP7b8b7c20When 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#TXMP4a9fbce4If 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#TXMP61d8aa8cA 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#TXMP1643aa76A 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#TXMP03cdd197Generally, 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#TXMP1291e14aThe 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#TXMP1c623e21If 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#TXMP0d14d218The 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#TXMP51b43e73If 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#TXMP4a72628bA 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#TXMP1b937c7aA 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#TXMP12f0dd94The 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#TXMP4d972946The 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.
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