Preparing a Net Operating Loss Carryforward Schedule for a C Corporation

Instructor: Salomien de klerk
In this lesson, we will explain how to prepare a net operating loss carryforward schedule for a C corporation. We also discuss the impact of net operating losses on tax planning.

Net Operating Loss Carryforward and Carryback

When a corporation's gross receipts and gains are more than its deductions and losses, it has a taxable income and it must pay income tax on it. On the other hand, when a company's deductions and losses are more than its gross receipts and gains, it has a net operating loss (NOL). Section 172 of the Internal Revenue Code allows taxpayers to use an NOL to reduce their taxable income in other tax years.

The provisions of section 172 have changed significantly a few times in recent years:

  • Before 2017, corporations were generally allowed to carry NOLs back for two years or forward for 20 years, and the amount of carried-forward NOL that could be applied against taxable income was only limited to the taxable income. This means that a taxpayer could decide whether they wanted an NOL to reduce any taxable income they have had in the two years before the NOL year and claim a refund for those years or whether they prefer to carry the NOL forward to reduce future taxable income and as a result future tax payments.
  • In 2017 the rules changed when the Tax Cuts and Jobs Act (TCJA) was signed into law. This TCJA did away with the carryback option and allowed NOLs to be carried forward indefinitely. It also limited the use of carried-forward NOL to 80% of the taxable income before the NOL reduction.
  • Then in 2020 the Coronavirus Aid, Relief, and Economic Security (CARES) Act was introduced, and it all changed again. The CARES act created a window period for NOL carryback. It allows for NOLs in tax years beginning in 2018, 2019, and 2020 to be carried back for five years or carried forward indefinitely. The CARES Act also suspended the 80% of taxable income limit on NOL carryovers for years beginning in 2018, 2019, and 2020

Taxpayers who decided to carry back their NOL can claim refunds by completing and filing the IRS's Form 1139 - Corporation Application for Tentative Refund. The form must be filed by the end of the tax year following the NOL year, and the IRS generally processes the refund within 90 days of filing the return.

Net Operating Loss Carryforward Schedule

The NOL for each tax year must be calculated without taking any NOLs from previous tax years into account, and NOL carryovers from multiple yeas are used on a First-In-First-Out basis. Taxpayers keep track of their net operating losses and their application in the net operating loss carryforward schedule. The schedule must include:

  • NOL carryovers from previous tax years.
  • NOL for the current tax year
  • NOL carried back to previous years
  • NOL ending balance carried forward

Example

MSK Inc., a calendar-year taxpayer, manufactures facial masks. It saw a declining demand for its product in the years 2013 to 2019 and suffered losses in some of them. In 2020, the business turned profitable again, following an increased demand for high-quality facial masks. Its results for the last 8 years are:

Year Taxable income
(Net Operating Loss)
2013 $200,000
2014 250,000
2015 210,000
2016 (350,000)
2017 (300,000)
2018 (250,000)
2020 200,000

MSK's NOL carryforward schedule can look like this:

2013 2014 2015 2016 2017 2018 2019 2020
Taxable income before NOL / (Net operating loss) $200,000 $250,000 $210,000 $100,000 $(350,000) $(300,000) $(250,000) $200,000
2017 NOL applied -210,000 -100,000
2018 NOL applied -200,000 -100,000
Tax-loss carryforward
Beginning balance 0 0 0 0 0 40,000 40,000 290,000
NOL for the year 0 0 0 0 350,000 300,000 250,000
0 0 0 0 350,000 340,000 290,000 290,000
Loss used:
Carryback -310,000 -300,000
Current year -200,000
Ending balance $0 $0 $0 $0 $40,000 $40,000 $290,000 $90,000

Note that:

  • The 2017 loss can only be carried back for 2 years, so only to 2015 and 2016. The balance must be carried forward and was used in 2020.
  • The 2018 and 2019 losses fall in the CARES Act window and can be carried back five years. The taxpayer decided to use them to reduce the 2013 and 2014 taxable income, and claim those refunds.
  • The balance of the NOL at the end of 2020 is from the 2019 (and not 2017 and 2019) NOL because NOLs are used on a FIFO basis.

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