§ 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
(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—
(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.
(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—
(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,
(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 federally declared disasters (as defined by subsection (h)(3)(C)(i)),[1] 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 federally declared disasters.
Such term shall not include any farming loss (as defined in subsection (i)) or qualified disaster loss (as defined in subsection (j)).
(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).
(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)
Carryback for 2008 or 2009 net operating losses
(i)
In general
In the case of an applicable net operating loss with respect to which the taxpayer has elected the application of this subparagraph—
(I)
subparagraph (A)(i) shall be applied by substituting any whole number elected by the taxpayer which is more than 2 and less than 6 for “2”,
(ii)
Applicable net operating loss
For purposes of this subparagraph, the term “applicable net operating loss” means the taxpayer’s net operating loss for a taxable year ending after December 31, 2007, and beginning before January 1, 2010.
(iii)
Election
(I)
In general
Any election under this subparagraph may be made only with respect to 1 taxable year.
(II)
Procedure
Any election under this subparagraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the return for the taxpayer’s last taxable year beginning in 2009. Any such election, once made, shall be irrevocable.
(iv)
Limitation on amount of loss carryback to 5th preceding taxable year
(I)
In general
The amount of any net operating loss which may be carried back to the 5th taxable year preceding the taxable year of such loss under clause (i) shall not exceed 50 percent of the taxpayer’s taxable income (computed without regard to the net operating loss for the loss year or any taxable year thereafter) for such preceding taxable year.
(II)
Carrybacks and carryovers to other taxable years
Appropriate adjustments in the application of the second sentence of paragraph (2) shall be made to take into account the limitation of subclause (I).
(III)
Exception for 2008 elections by small businesses
Subclause (I) shall not apply to any loss of an eligible small business with respect to any election made under this subparagraph as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009.
(v)
Special rules for small business
(I)
In general
In the case of an eligible small business which made or makes an election under this subparagraph as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009, clause (iii)(I) shall be applied by substituting “2 taxable years” for “1 taxable year”.
(II)
Eligible small business
For purposes of this subparagraph, the term “eligible small business” has the meaning given such term by subparagraph (F)(iii), except that in applying such subparagraph, section
448
(c) shall be applied by substituting “$15,000,000” for “$5,000,000” each place it appears.
(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—
(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)—
(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 [2] (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:
(2)
Capital gains and losses of taxpayers other than corporations
In the case of a taxpayer other than a corporation—
(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
shall be treated as attributable to the trade or business;
(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—
(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:
(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—
(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—
(4)
Product liability
The term “product liability” means—
(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—
(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—
(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.
(C)
Allocable deductions not to exceed interest increases
Allocable interest deductions for any loss limitation year shall not exceed the excess (if any) of—
(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—
(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
(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.
(C)
Excess distribution
The term “excess distribution” means the excess (if any) of—
(D)
Rules for applying subparagraph (B)
For purposes of subparagraph (B)—
(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)—
(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,
(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
Such term shall not include any qualified disaster loss (as defined in subsection (j)).
(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)
Rules relating to qualified disaster losses
For purposes of this section—
(1)
In general
The term “qualified disaster loss” means the lesser of—
(A)
the sum of—
(i)
the losses allowable under section
165 for the taxable year—
(I)
attributable to a federally declared disaster (as defined in section
165
(h)(3)(C)(i)) occurring before January 1, 2010, and
(2)
Coordination with subsection (b)(2)
For purposes of applying subsection (b)(2), a qualified disaster 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)(J) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to subsection (b)(1)(J). 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.
[1] So in original. Probably means subsection (h)(3)(C)(i) of section 165 of this title.
[2] So in original. Probably should be followed by “of 1935”.
[3] So in original. Probably should be followed by “to”.