26 U.S.C. § 172 : US Code - Section 172: Net operating loss deduction

Search 26 U.S.C. § 172 : US Code - Section 172: Net operating loss deduction

(a) Deduction allowed
There shall be allowed as a deduction for the taxable year an
amount equal to the aggregate of (1) the net operating loss
carryovers to such year, plus (2) the net operating loss carrybacks
to such year. For purposes of this subtitle, the term "net
operating loss deduction" means the deduction allowed by this
subsection.
(b) Net operating loss carrybacks and carryovers
(1) Years to which loss may be carried
(A) General rule
Except as otherwise provided in this paragraph, a net
operating loss for any taxable year -
(i) shall be a net operating loss carryback to each of the
2 taxable years preceding the taxable year of such loss, and
(ii) shall be a net operating loss carryover to each of the
20 taxable years following the taxable year of the loss.
(B) Special rules for REIT's
(i) In general
A net operating loss for a REIT year shall not be a net
operating loss carryback to any taxable year preceding the
taxable year of such loss.
(ii) Special rule
In the case of any net operating loss for a taxable year
which is not a REIT year, such loss shall not be carried back
to any taxable year which is a REIT year.
(iii) REIT year
For purposes of this subparagraph, the term "REIT year"
means any taxable year for which the provisions of part II of
subchapter M (relating to real estate investment trusts)
apply to the taxpayer.
(C) Specified liability losses
In the case of a taxpayer which has a specified liability
loss (as defined in subsection (f)) for a taxable year, such
specified liability loss shall be a net operating loss
carryback to each of the 10 taxable years preceding the taxable
year of such loss.
(D) Bad debt losses of commercial banks
In the case of any bank (as defined in section 585(a)(2)),
the portion of the net operating loss for any taxable year
beginning after December 31, 1986, and before January 1, 1994,
which is attributable to the deduction allowed under section
166(a) shall be a net operating loss carryback to each of the
10 taxable years preceding the taxable year of the loss and a
net operating loss carryover to each of the 5 taxable years
following the taxable year of such loss.
(E) Excess interest loss
(i) In general
If -
(I) there is a corporate equity reduction transaction,
and
(II) an applicable corporation has a corporate equity
reduction interest loss for any loss limitation year ending
after August 2, 1989,
then the corporate equity reduction interest loss shall be a
net operating loss carryback and carryover to the taxable
years described in subparagraph (A), except that such loss
shall not be carried back to a taxable year preceding the
taxable year in which the corporate equity reduction
transaction occurs.
(ii) Loss limitation year
For purposes of clause (i) and subsection (h), the term
"loss limitation year" means, with respect to any corporate
equity reduction transaction, the taxable year in which such
transaction occurs and each of the 2 succeeding taxable
years.
(iii) Applicable corporation
For purposes of clause (i), the term "applicable
corporation" means -
(I) a C corporation which acquires stock, or the stock of
which is acquired in a major stock acquisition,
(II) a C corporation making distributions with respect
to, or redeeming, its stock in connection with an excess
distribution, or
(III) a C corporation which is a successor of a
corporation described in subclause (I) or (II).
(iv) Other definitions
For definitions of terms used in this subparagraph, see
subsection (h).
(F) Retention of 3-year carryback in certain cases
(i) In general
Subparagraph (A)(i) shall be applied by substituting "3
taxable years" for "2 taxable years" with respect to the
portion of the net operating loss for the taxable year which
is an eligible loss with respect to the taxpayer.
(ii) Eligible loss
For purposes of clause (i), the term "eligible loss" means -

(I) in the case of an individual, losses of property
arising from fire, storm, shipwreck, or other casualty, or
from theft,
(II) in the case of a taxpayer which is a small business,
net operating losses attributable to Presidentially
declared disasters (as defined in section 1033(h)(3)), and
(III) in the case of a taxpayer engaged in the trade or
business of farming (as defined in section 263A(e)(4)), net
operating losses attributable to such Presidentially
declared disasters.
Such term shall not include any farming loss (as defined in
subsection (i)).
(iii) Small business
For purposes of this subparagraph, the term "small
business" means a corporation or partnership which meets the
gross receipts test of section 448(c) for the taxable year in
which the loss arose (or, in the case of a sole
proprietorship, which would meet such test if such
proprietorship were a corporation).
(iv) Coordination with paragraph (2)
For purposes of applying paragraph (2), an eligible loss
for any taxable year shall be treated in a manner similar to
the manner in which a specified liability loss is treated.
(G) Farming losses
In the case of a taxpayer which has a farming loss (as
defined in subsection (i)) for a taxable year, such farming
loss shall be a net operating loss carryback to each of the 5
taxable years preceding the taxable year of such loss.
(H) In the case of a net operating loss for any taxable year
ending during 2001 or 2002, subparagraph (A)(i) shall be
applied by substituting "5" for "2" and subparagraph (F) shall
not apply.
(I) Transmission property and pollution control investment
(i) In general
At the election of the taxpayer for any taxable year ending
after December 31, 2005, and before January 1, 2009, in the
case of a net operating loss for a taxable year ending after
December 31, 2002, and before January 1, 2006, there shall be
a net operating loss carryback to each of the 5 taxable years
preceding the taxable year of such loss to the extent that
such loss does not exceed 20 percent of the sum of the
electric transmission property capital expenditures and the
pollution control facility capital expenditures of the
taxpayer for the taxable year preceding the taxable year for
which such election is made.
(ii) Limitations
For purposes of this subsection -
(I) not more than one election may be made under clause
(i) with respect to any net operating loss for a taxable
year, and
(II) an election may not be made under clause (i) for
more than 1 taxable year beginning in any calendar year.
(iii) Coordination with ordering rule
For purposes of applying subsection (b)(2), the portion of
any loss which is carried back 5 years by reason of clause
(i) shall be treated in a manner similar to the manner in
which a specified liability loss is treated.
(iv) Special rules relating to credit or refund
In the case of the portion of the loss which is carried
back 5 years by reason of clause (i) -
(I) an application under section 6411(a) with respect to
such portion shall not fail to be treated as timely filed
if filed within 24 months after the due date specified
under such section, and
(II) references in sections 6501(h), 6511(d)(2)(A), and
6611(f)(1) to the taxable year in which such net operating
loss arises or results in a net operating loss carryback
shall be treated as references to the taxable year for
which such election is made.
(v) Definitions
For purposes of this subparagraph -
(I) Electric transmission property capital expenditures
The term "electric transmission property capital
expenditures" means any expenditure, chargeable to capital
account, made by the taxpayer which is attributable to
electric transmission property used by the taxpayer in the
transmission at 69 or more kilovolts of electricity for
sale. Such term shall not include any expenditure which may
be refunded or the purpose of which may be modified at the
option of the taxpayer so as to cease to be treated as an
expenditure within the meaning of such term.
(II) Pollution control facility capital expenditures
The term "pollution control facility capital
expenditures" means any expenditure, chargeable to capital
account, made by an electric utility company (as defined in
section 2(3) of the Public Utility Holding Company Act (!1)
(15 U.S.C. 79b(3)), as in effect on the day before the date
of the enactment of the Energy Tax Incentives Act of 2005)
which is attributable to a facility which will qualify as a
certified pollution control facility as determined under
section 169(d)(1) by striking "before January 1, 1976," and
by substituting "an identifiable" for "a new identifiable".
Such term shall not include any expenditure which may be
refunded or the purpose of which may be modified at the
option of the taxpayer so as to cease to be treated as an
expenditure within the meaning of such term.
(2) Amount of carrybacks and carryovers
The entire amount of the net operating loss for any taxable
year (hereinafter in this section referred to as the "loss year")
shall be carried to the earliest of the taxable years to which
(by reason of paragraph (1)) such loss may be carried. The
portion of such loss which shall be carried to each of the other
taxable years shall be the excess, if any, of the amount of such
loss over the sum of the taxable income for each of the prior
taxable years to which such loss may be carried. For purposes of
the preceding sentence, the taxable income for any such prior
taxable year shall be computed -
(A) with the modifications specified in subsection (d) other
than paragraphs (1), (4), and (5) thereof, and
(B) by determining the amount of the net operating loss
deduction without regard to the net operating loss for the loss
year or for any taxable year thereafter,
and the taxable income so computed shall not be considered to be
less than zero.
(3) Election to waive carryback
Any taxpayer entitled to a carryback period under paragraph (1)
may elect to relinquish the entire carryback period with respect
to a net operating loss for any taxable year. Such election shall
be made in such manner as may be prescribed by the Secretary, and
shall be made by the due date (including extensions of time) for
filing the taxpayer's return for the taxable year of the net
operating loss for which the election is to be in effect. Such
election, once made for any taxable year, shall be irrevocable
for such taxable year.
(c) Net operating loss defined
For purposes of this section, the term "net operating loss" means
the excess of the deductions allowed by this chapter over the gross
income. Such excess shall be computed with the modifications
specified in subsection (d).
(d) Modifications
The modifications referred to in this section are as follows:
(1) Net operating loss deduction
No net operating loss deduction shall be allowed.
(2) Capital gains and losses of taxpayers other than corporations
In the case of a taxpayer other than a corporation -
(A) the amount deductible on account of losses from sales or
exchanges of capital assets shall not exceed the amount
includable on account of gains from sales or exchanges of
capital assets; and
(B) the exclusion provided by section 1202 shall not be
allowed.
(3) Deduction for personal exemptions
No deduction shall be allowed under section 151 (relating to
personal exemptions). No deduction in lieu of any such deduction
shall be allowed.
(4) Nonbusiness deductions of taxpayers other than corporations
In the case of a taxpayer other than a corporation, the
deductions allowable by this chapter which are not attributable
to a taxpayer's trade or business shall be allowed only to the
extent of the amount of the gross income not derived from such
trade or business. For purposes of the preceding sentence -
(A) any gain or loss from the sale or other disposition of -
(i) property, used in the trade or business, of a character
which is subject to the allowance for depreciation provided
in section 167, or
(ii) real property used in the trade or business,
shall be treated as attributable to the trade or business;
(B) the modifications specified in paragraphs (1), (2)(B),
and (3) shall be taken into account;
(C) any deduction for casualty or theft losses allowable
under paragraph (2) or (3) of section 165(c) shall be treated
as attributable to the trade or business; and
(D) any deduction allowed under section 404 to the extent
attributable to contributions which are made on behalf of an
individual who is an employee within the meaning of section
401(c)(1) shall not be treated as attributable to the trade or
business of such individual.
(5) Computation of deduction for dividends received, etc.
The deductions allowed by sections 243 (relating to dividends
received by corporations), 244 (relating to dividends received on
certain preferred stock of public utilities), and 245 (relating
to dividends received from certain foreign corporations) shall be
computed without regard to section 246(b) (relating to limitation
on aggregate amount of deductions); and the deduction allowed by
section 247 (relating to dividends paid on certain preferred
stock of public utilities) shall be computed without regard to
subsection (a)(1)(B) of such section.
(6) Modifications related to real estate investment trusts
In the case of any taxable year for which part II of subchapter
M (relating to real estate investment trusts) applies to the
taxpayer -
(A) the net operating loss for such taxable year shall be
computed by taking into account the adjustments described in
section 857(b)(2) (other than the deduction for dividends paid
described in section 857(b)(2)(B)); and
(B) where such taxable year is a "prior taxable year"
referred to in paragraph (2) of subsection (b), the term
"taxable income" in such paragraph shall mean "real estate
investment trust taxable income" (as defined in section
857(b)(2)).
(7) Manufacturing deduction
The deduction under section 199 shall not be allowed.
(e) Law applicable to computations
In determining the amount of any net operating loss carryback or
carryover to any taxable year, the necessary computations involving
any other taxable year shall be made under the law applicable to
such other taxable year.
(f) Rules relating to specified liability loss
For purposes of this section -
(1) In general
The term "specified liability loss" means the sum of the
following amounts to the extent taken into account in computing
the net operating loss for the taxable year:
(A) Any amount allowable as a deduction under section 162 or
165 which is attributable to -
(i) product liability, or
(ii) expenses incurred in the investigation or settlement
of, or opposition to, claims against the taxpayer on account
of product liability.
(B)(i) Any amount allowable as a deduction under this chapter
(other than section 468(a)(1) or 468A(a)) which is in
satisfaction of a liability under a Federal or State law
requiring -
(I) the reclamation of land,
(II) the decommissioning of a nuclear power plant (or any
unit thereof),
(III) the dismantlement of a drilling platform,
(IV) the remediation of environmental contamination, or
(V) a payment under any workers compensation act (within
the meaning of section 461(h)(2)(C)(i)).
(ii) A liability shall be taken into account under this
subparagraph only if -
(I) the act (or failure to act) giving rise to such
liability occurs at least 3 years before the beginning of the
taxable year, and
(II) the taxpayer used an accrual method of accounting
throughout the period or periods during which such act (or
failure to act) occurred.
(2) Limitation
The amount of the specified liability loss for any taxable year
shall not exceed the amount of the net operating loss for such
taxable year.
(3) Special rule for nuclear powerplants
Except as provided in regulations prescribed by the Secretary,
that portion of a specified liability loss which is attributable
to amounts incurred in the decommissioning of a nuclear
powerplant (or any unit thereof) may, for purposes of subsection
(b)(1)(C), be carried back to each of the taxable years during
the period -
(A) beginning with the taxable year in which such plant (or
unit thereof) was placed in service, and
(B) ending with the taxable year preceding the loss year.
(4) Product liability
The term "product liability" means -
(A) liability of the taxpayer for damages on account of
physical injury or emotional harm to individuals, or damage to
or loss of the use of property, on account of any defect in any
product which is manufactured, leased, or sold by the taxpayer,
but only if
(B) such injury, harm, or damage arises after the taxpayer
has completed or terminated operations with respect to, and has
relinquished possession of, such product.
(5) Coordination with subsection (b)(2)
For purposes of applying subsection (b)(2), a specified
liability loss for any taxable year shall be treated as a
separate net operating loss for such taxable year to be taken
into account after the remaining portion of the net operating
loss for such taxable year.
(6) Election
Any taxpayer entitled to a 10-year carryback under subsection
(b)(1)(C) from any loss year may elect to have the carryback
period with respect to such loss year determined without regard
to subsection (b)(1)(C). Such election shall be made in such
manner as may be prescribed by the Secretary and shall be made by
the due date (including extensions of time) for filing the
taxpayer's return for the taxable year of the net operating loss.
Such election, once made for any taxable year, shall be
irrevocable for that taxable year.
(g) Rules relating to bad debt losses of commercial banks
For purposes of this section -
(1) Portion attributable to deduction for bad debts
The portion of the net operating loss for any taxable year
which is attributable to the deduction allowed under section
166(a) shall be the excess of -
(i) the net operating loss for such taxable year, over
(ii) the net operating loss for such taxable year determined
without regard to the amount allowed as a deduction under
section 166(a) for such taxable year.
(2) Coordination with subsection (b)(2)
For purposes of subsection (b)(2), the portion of a net
operating loss for any taxable year which is attributable to the
deduction allowed under section 166(a) shall be treated in a
manner similar to the manner in which a specified liability loss
is treated.
(h) Corporate equity reduction interest losses
For purposes of this section -
(1) In general
The term "corporate equity reduction interest loss" means, with
respect to any loss limitation year, the excess (if any) of -
(A) the net operating loss for such taxable year, over
(B) the net operating loss for such taxable year determined
without regard to any allocable interest deductions otherwise
taken into account in computing such loss.
(2) Allocable interest deductions
(A) In general
The term "allocable interest deductions" means deductions
allowed under this chapter for interest on the portion of any
indebtedness allocable to a corporate equity reduction
transaction.
(B) Method of allocation
Except as provided in regulations and subparagraph (E),
indebtedness shall be allocated to a corporate equity reduction
transaction in the manner prescribed under clause (ii) of
section 263A(f)(2)(A) (without regard to clause (i) thereof).
(C) Allocable deductions not to exceed interest increases
Allocable interest deductions for any loss limitation year
shall not exceed the excess (if any) of -
(i) the amount allowable as a deduction for interest paid
or accrued by the taxpayer during the loss limitation year,
over
(ii) the average of such amounts for the 3 taxable years
preceding the taxable year in which the corporate equity
reduction transaction occurred.
(D) De minimis rule
A taxpayer shall be treated as having no allocable interest
deductions for any taxable year if the amount of such
deductions (without regard to this subparagraph) is less than
$1,000,000.
(E) Special rule for certain unforeseeable events
If an unforeseeable extraordinary adverse event occurs during
a loss limitation year but after the corporate equity reduction
transaction -
(i) indebtedness shall be allocated in the manner described
in subparagraph (B) to unreimbursed costs paid or incurred in
connection with such event before being allocated to the
corporate equity reduction transaction, and
(ii) the amount determined under subparagraph (C)(i) shall
be reduced by the amount of interest on indebtedness
described in clause (i).
(F) Transition rule
If any of the 3 taxable years described in subparagraph
(C)(ii) end on or before August 2, 1989, the taxpayer may
substitute for the amount determined under such subparagraph an
amount equal to the interest paid or accrued (determined on an
annualized basis) during the taxpayer's taxable year which
includes August 3, 1989, on indebtedness of the taxpayer
outstanding on August 2, 1989.
(3) Corporate equity reduction transaction
(A) In general
The term "corporate equity reduction transaction" means -
(i) a major stock acquisition, or
(ii) an excess distribution.
(B) Major stock acquisition
(i) In general
The term "major stock acquisition" means the acquisition by
a corporation pursuant to a plan of such corporation (or any
group of persons acting in concert with such corporation) of
stock in another corporation representing 50 percent or more
(by vote or value) of the stock in such other corporation.
(ii) Exception
The term "major stock acquisition" does not include a
qualified stock purchase (within the meaning of section 338)
to which an election under section 338 applies.
(C) Excess distribution
The term "excess distribution" means the excess (if any) of -

(i) the aggregate distributions (including redemptions)
made during a taxable year by a corporation with respect to
its stock, over
(ii) the greater of -
(I) 150 percent of the average of such distributions
during the 3 taxable years immediately preceding such
taxable year, or
(II) 10 percent of the fair market value of the stock of
such corporation as of the beginning of such taxable year.
(D) Rules for applying subparagraph (B)
For purposes of subparagraph (B) -
(i) Plans to acquire stock
All plans referred to in subparagraph (B) by any
corporation (or group of persons acting in concert with such
corporation) with respect to another corporation shall be
treated as 1 plan.
(ii) Acquisitions during 24-month period
All acquisitions during any 24-month period shall be
treated as pursuant to 1 plan.
(E) Rules for applying subparagraph (C)
For purposes of subparagraph (C) -
(i) Certain preferred stock disregarded
Stock described in section 1504(a)(4), and distributions
(including redemptions) with respect to such stock, shall be
disregarded.
(ii) Issuance of stock
The amounts determined under clauses (i) and (ii)(I) of
subparagraph (C) shall be reduced by the aggregate amount of
stock issued by the corporation during the applicable period
in exchange for money or property other than stock in the
corporation.
(4) Other rules
(A) Ordering rule
For purposes of paragraph (1), in determining the allocable
interest deductions taken into account in computing the net
operating loss for any taxable year, taxable income for such
taxable year shall be treated as having been computed by taking
allocable interest deductions into account after all other
deductions.
(B) Coordination with subsection (b)(2)
For purposes of subsection (b)(2) -
(i) a corporate equity reduction interest loss shall be
treated in a manner similar to the manner in which a
specified liability loss is treated, and
(ii) in determining the net operating loss deduction for
any prior taxable year referred to in the 3rd sentence of
subsection (b)(2), the portion of any net operating loss
which may not be carried to such taxable year under
subsection (b)(1)(E) shall not be taken into account.
(C) Members of affiliated groups
Except as provided by regulations, all members of an
affiliated group filing a consolidated return under section
1501 shall be treated as 1 taxpayer for purposes of this
subsection and subsection (b)(1)(E).
(5) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection, including
regulations -
(A) for applying this subsection to successor corporations
and in cases where a taxpayer becomes, or ceases to be, a
member of an affiliated group filing a consolidated return
under section 1501,
(B) to prevent the avoidance of this subsection through
related parties, pass-through entities, and intermediaries, and
(C) for applying this subsection where more than 1
corporation is involved in a corporate equity reduction
transaction.
(i) Rules relating to farming losses
For purposes of this section -
(1) In general
The term "farming loss" means the lesser of -
(A) the amount which would be the net operating loss for the
taxable year if only income and deductions attributable to
farming businesses (as defined in section 263A(e)(4)) are taken
into account, or
(B) the amount of the net operating loss for such taxable
year.
(2) Coordination with subsection (b)(2)
For purposes of applying subsection (b)(2), a farming loss for
any taxable year shall be treated in a manner similar to the
manner in which a specified liability loss is treated.
(3) Election
Any taxpayer entitled to a 5-year carryback under subsection
(b)(1)(G) from any loss year may elect to have the carryback
period with respect to such loss year determined without regard
to subsection (b)(1)(G). Such election shall be made in such
manner as may be prescribed by the Secretary and shall be made by
the due date (including extensions of time) for filing the
taxpayer's return for the taxable year of the net operating loss.
Such election, once made for any taxable year, shall be
irrevocable for such taxable year.
(j) Election to disregard 5-year carryback for certain net
operating losses
Any taxpayer entitled to a 5-year carryback under subsection
(b)(1)(H) from any loss year may elect to have the carryback period
with respect to such loss year determined without regard to
subsection (b)(1)(H). Such election shall be made in such manner as
may be prescribed by the Secretary and shall be made by the due
date (including extensions of time) for filing the taxpayer's
return for the taxable year of the net operating loss. Such
election, once made for any taxable year, shall be irrevocable for
such taxable year.
(k) Cross references
(1) For treatment of net operating loss carryovers in certain
corporate acquisitions, see section 381.
(2) For special limitation on net operating loss carryovers
in case of a corporate change of ownership, see section 382.