1.904(f)-7T—Separate limitation loss and the separate limitation loss account (temporary).
(a) Overview of regulations.
This section provides rules for determining a taxpayer's separate limitation losses, for establishing separate limitation loss accounts, and for making additions to and reductions from such accounts for purposes of section 904(f). Section 1.904(f)-8T provides rules for recharacterizing the balance in any separate limitation loss account under the general recharacterization rule of section 904(f)(5)(C).
(b) Definitions.
The definitions in paragraphs (b)(1) through (4) of this section apply for purposes of this section and §§ 1.904(f)-8T and 1.904(g)-3T.
(1)
Separate category means each separate category of income described in section 904(d) and any other category of income described in § 1.904-4(m). For example, income subject to section 901(j) or 904(h)(10) is income in a separate category.
(2)
Separate limitation income means, with respect to any separate category, the taxable income from sources outside the United States, separately computed for that category for the taxable year. Separate limitation income shall be determined by taking into account any adjustments for capital gains and losses under section 904(b)(2) and § 1.904(b)-1. See § 1.904(b)-1(h)(1)(i).
(3)
Separate limitation loss means, with respect to any separate category, the amount by which the foreign source gross income in that category is exceeded by the sum of expenses, losses and other deductions (not including any net operating loss deduction under section 172(a) or any expropriation loss or casualty loss described in section 907(c)(4)(B)(iii)) properly allocated and apportioned thereto for the taxable year. Separate limitation losses are determined separately for each separate category. Accordingly, income and deductions attributable to a separate category are not netted with income and deductions attributable to another separate category for purposes of determining the amount of a separate limitation loss. Separate limitation losses shall be determined by taking into account any adjustments for capital gains and losses under section 904(b)(2) and § 1.904(b)-1. See § 1.904(b)-1(h)(1)(i).
(c) Separate limitation loss account.
Any taxpayer that sustains a separate limitation loss that is allocated to reduce separate limitation income of the taxpayer under the rules of § 1.904(g)-3T must establish a separate limitation loss account for the loss. The taxpayer must establish separate loss accounts for each separate category in which a separate limitation loss is incurred that is allocated to reduce other separate limitation income. A separate account must then be established for each separate category to which a portion of the loss is allocated. The balance in any separate limitation loss account represents the amount of separate limitation income that is subject to recharacterization (as income in another separate category) in a subsequent year pursuant to § 1.904(f)-8T and section 904(f)(5)(F). From year to year, amounts may be added to or subtracted from the balance in such loss accounts, as provided in paragraphs (d) and (e) of this section.
(d) Additions to separate limitation loss accounts—
(1) General rule.
A taxpayer's separate limitation loss as defined in paragraph (b)(3) of this section shall be added to the applicable separate limitation loss accounts at the end of the taxable year to the extent that the separate limitation loss has reduced separate limitation income in one or more other separate categories of the taxpayer during the taxable year. For rules with respect to net operating loss carryovers, see paragraph (d)(3) of this section and § 1.904(g)-3T.
(2) Separate limitation losses of another taxpayer.
If any portion of any separate limitation loss account of another taxpayer is allocated to the taxpayer in accordance with § 1.1502-9T (relating to consolidated separate limitation losses) the taxpayer shall add such amount to its applicable separate limitation loss account.
(3) Additions to separate limitation loss account created by loss carryovers.
The taxpayer shall add to each separate limitation loss account all net operating loss carryovers to the current taxable year to the extent that separate limitation losses included in the net operating loss carryovers reduced foreign source income in other separate categories for the taxable year.
(e) Reductions of separate limitation loss accounts.
The taxpayer shall subtract the following amounts from its separate limitation loss accounts at the end of its taxable year in the following order as applicable:
(1) Pre-recapture reduction for amounts allocated to other taxpayers.
A separate limitation loss account is reduced by the amount of any separate limitation loss account which is allocated to another taxpayer in accordance with § 1.1502-9T (relating to consolidated separate limitation losses).
(2) Reduction for offsetting loss accounts.
A separate limitation account is reduced to take into account any netting of separate limitation loss accounts under § 1.904(g)-3T(c).
(3) Reduction for amounts recaptured.
A separate limitation loss account is reduced by the amount of any separate limitation income that is earned in the same separate category as the separate limitation loss that resulted in the account and that is recharacterized in accordance with § 1.904(f)-8T (relating to recapture of separate limitation losses) or section 904(f)(5)(F) (relating to recapture of separate limitation loss accounts out of gain realized from dispositions).
(f) Effective/applicability date.
This section applies to taxpayers that sustain separate limitation losses in taxable years beginning after December 21, 2007. For taxable years beginning after December 31, 1986, and on or before December 21, 2007, see section 904(f)(5).