Net Operating Losses on Corporate Income Tax Returns

PURPOSE: This rule explains the proper Missouri income tax treatment of net operating losses by corporations. (1) Federal Taxable Income Less Than Zero (0). Federal taxable income is the starting point for computing a corporation’s Missouri taxable income. Federal taxable income, as it is used to compute a corporation’s Missouri taxable income, may be a positive figure, a negative figure, or zero. (2) Net Operating Loss (NOL). (A) Taxpayers who file a consolidated Missouri return must treat NOLs identically on the federal and Missouri returns. (B) Taxpayers who file separate federal and Missouri returns must treat NOLs identically on the federal and Missouri returns. (C) Consolidated Federal and Separate Missouri Return. Taxpayers who file consolidated federal and separate Missouri returns shall compute separate federal taxable income as if each member filed a separate federal return with the limitation that the taxpayer shall be bound by the election to carry losses forward or backward made on the consolidated return. If there is a consolidated gain, then the Missouri taxpayer may elect to carry loss backward or forward to the extent allowed under Internal Revenue Code section 172. (D) Notwithstanding the foregoing subsections of section (2) of this rule, to the extent an NOL is carried backward for more than two (2) years or carried forward for more than twenty (20) years on the federal income tax return, that amount of the NOL generally must be added to federal taxable income in arriving at Missouri taxable income pursuant to section 143.121.2(4), RSMo. Any amount of NOL taken against federal taxable income but disallowed for Missouri income tax purposes under section 143.121.2(4), RSMo, may be carried forward and taken against any income on the Missouri corporate income tax return for a period of not more than twenty (20) years following the year of initial loss. (3) Recomputation of the Federal Income Tax Deduction for Separate Missouri Return Filers to Reflect Consolidated Return NOL. Taxpayer’s federal income tax deduction shall be determined as follows. First, a fraction shall be created, the numerator of which is the taxpayer’s original federal taxable income reduced by its pro rata share of the consolidated loss and the denominator of which is the original consolidated federal taxable income reduced by total consolidated loss. Next, total federal income tax of the consolidated group after deduction of the net operating loss is multiplied by the fraction, and then multiplied by fifty percent (50%), to arrive at the adjusted federal income tax deduction. (A) Example: 2014 consolidated loss of $75,000 carried back to 2012. First, allocate the loss to the loss companies. Company Federal Taxable Income (Loss) To Total Percent Allocated Consolidated Loss A ($50,000) 45.455% $34,091 B C ($50,000) 45.455% $34,091 D E ($10,000) 9.090% $6,818 ($110,000) 100% $75,000 Second, reduce original taxable income by the allocated loss. Company 2012 Original Federal Taxable Income 2014 Allocated Loss New Federal Taxable Income To Total Percent Adjusted 2012 Federal Income Tax Liability A $100,000 ($34,091) $65,909 26.460% $19,845 B $50,000 $50,000 20.073% $15,055 C $25,000 ($34,091) D $100,000 $100,000 40.146% $30,110 E $40,000 ($6,818) $33,182 13.321% $9,990 $315,000 ($75,000) $249,091 100% $75,000 Third, multiply the resulting adjusted federal income tax liability of the taxpayer by fifty percent (50%). (B) Actual separate return loss will be used to compute separate return federal taxable income. (4) Leaving a Consolidated Group. A former member of a consolidated group who filed a separate Missouri return must recompute its federal income tax deduction to reflect any decrease in consolidated federal income tax liability attributable to an NOL carry back by the group and to reflect any change in its relative share of federal income tax liability attributable to the net operating loss carry back by the group. (5) Taxpayers who elect a proper method of computing the federal income tax deduction for a particular year shall continue to use that method to compute the effect of NOL on the federal income tax deduction for that year, regardless of the method used in the year of the loss. (6) When the filing status or combination for the Missouri return for any taxable year is different from the federal filing status or combination for that taxable year, the taxpayer must follow the federal Internal Revenue Code (IRC) as it would apply to the facts and circumstances for the Missouri return. Under no circumstances may the same loss or deduction be used more than once for Missouri purposes. A taxpayer claiming an NOL deduction shall provide a schedule identifying the source of each loss or deduction. If a corporate member of an affiliated group incurs an NOL arising from a loss year for which such member files a separate Missouri return or no Missouri return, then that NOL cannot be carried to a consolidated Missouri income tax return for a different tax year (the carryover tax year), except insofar as that particular NOL is carried forward or backward and actually deducted on the affiliated group’s consolidated federal income tax return for that carryover tax year, as reflected in the affiliated group’s federal taxable income for that carryover tax year. (7) If a corporation derives only part of its income from sources within Missouri, its Missouri taxable income shall only reflect an apportioned amount of the NOL deduction, consistent with section 143.455.19, RSMo. (8) The loss year referred to in section 143.431.4, RSMo, may include the loss year of another taxpayer if the NOL occurred in a loss year of another taxpayer. For example, in the situation of a corporate merger where the taxpayer whose loss year gave rise to the NOL did not survive the merger, the net operating loss addition modification must still be computed by reference to the addition and subtraction modifications for the loss year of the corporation that did not survive the merger. For purposes of section 143.431.4, RSMo, if more than one (1) net operating loss addition modification must be computed for a given tax year, the net operating loss addition modifications are computed in the same order that the net operating losses are used as net operating loss deductions for federal income tax purposes. (9) Notwithstanding any provision of this rule to the contrary, nothing in this rule shall be interpreted or construed as incorporating by reference any rule, regulation, standard, or guideline of a federal agency. AUTHORITY: section 143.961, RSMo 2016, and section 143.431, RSMo Supp. 2023.* Original rule filed Oct. 22, 1986, effective March 26, 1987. Amended: Filed Feb. 23, 1989, effective Aug. 11, 1989. Amended: Filed Jan. 10, 2002, effective July 30, 2002. Amended: Filed Jan. 24, 2024, effective Sept. 30, 2024. *Original authority: 143.431, RSMo 1972, amended 2004, 2007, 2018, and 143.961, RSMo 1972.