103 KAR 16:250. Net operating loss

deduction for corporations.

 

      RELATES TO KRS 141.011, 141.200

      STATUTORY AUTHORITY: KRS 131.130, 141.018

      NECESSITY, FUNCTION AND CONFORMITY: KRS

131.130(1) authorizes the Department of Revenue to promulgate administrative

regulations necessary to administer and enforce Kentucky's tax laws. KRS

141.018 requires the department to promulgate administrative regulations

necessary to explain or implement 2005 Ky. Acts ch. 168 relative to the

imposition of the tax assessed under KRS Chapter 141 on individuals, the

passed-through income of entities taxable under KRS 141.040, and any related

item of income, deduction, or credit. This administrative regulation

establishes methods of computing a corporation’s net operating loss deduction

and application of the deduction to prior and subsequent taxable years on taxable

net income as authorized by KRS 141.011 and 141.200(11)(b).

 

      Section 1. Definitions. (1)

"Allowable net operating loss carryforward from a previous period"

means for a nexus consolidated filer, a net operating loss carryforward

computed under the provisions of Section 2(3) or (4) of this administrative

regulation.

      (2) "Corporation" is defined

by:

      (a) KRS 141.200(2)(d) for an elective

consolidated return; or

      (b) KRS 141.010(24) for a separate or

nexus consolidated return for periods beginning on or after January 1, 2005.

      (3) "Corporation income tax

nexus" means being subject to the corporation income tax imposed by KRS

141.040(1).

      (4) "Current year loss

limitation" means the limitation provided by KRS 141.200(11)(b).

      (5) "Current year loss limitation

adjustment" means the amount of net operating losses of the includible

corporations in a nexus consolidated return, including any allowable net

operating loss carryforward from a previous period that exceeds the current

year loss limitation.

      (6) "Elective consolidated

filer" means a corporation as defined in Section 7701(a)(3) of the

Internal Revenue Code, 26 U.S.C. 7701(a)(3), filing in accordance with KRS

141.200(3) and (4).

      (7) "Elective consolidated

return" means a return defined under KRS 141.200(2)(b).

      (8) "Includible corporation" is

defined in KRS 141.200(9)(d).

      (9) "Net operating loss" means

net operating loss defined under the Internal Revenue Code as adjusted for

differences between KRS Chapter 141 and the Internal Revenue Code.

      (10) "Nexus consolidated filer"

means a corporation as defined under KRS 141.010(24), filing in accordance with

KRS 141.200(8), (9), (10) and (11).

      (11) "Nexus consolidated

return" means a return defined under KRS 141.200(9)(f).

      (12) "Separate return" is

defined by KRS 141.200(2)(c) or 141.200(9)(g).

      (13) "Separate return filer"

means a corporation filing in accordance with KRS 141.200(3) or 141.200(10).

 

      Section 2. Computation and Application of

Net Operating Loss. (1) "Separate return filers" and "elective

consolidated filers" shall compute net operating loss for Kentucky

purposes in the following manner:

      (a) Apportionment factor provided by KRS

141.120 shall be applied to the net operating loss; and

      (b) The apportioned net operating loss

shall be available for carryforward.

      (2) "Nexus consolidated filers"

shall compute net operating loss for Kentucky purposes in accordance with this

subsection:

      (a) Net operating loss computations shall

be made before application of the apportionment factor provided by KRS 141.120.

      (b) The current year loss limitation

adjustment shall be:

      1. Added to net income if the total of

the net operating losses for the includible corporations that have incurred a

net operating loss for the current taxable year and any allowable net operating

loss carryforward from a previous period exceeds the current year loss

limitation; or

      2. Subtracted from net income if the

current year loss limitation is greater than the total of the current year

losses of includible corporations and any allowable net operating loss

carryforward from a previous period.

      (c) Any current year loss limitation

adjustment that exceeds the current year loss limitation shall be available as

a Kentucky net operating loss carryforward, and shall be available to be

applied against the current year loss limitation for future taxable periods

pursuant to KRS 141.200(11)(b).

      (3) Separate return loss year rules for a

nexus consolidated return. This subsection shall apply if a corporation that

previously filed a separate return, and incurred net operating losses as a

separate entity, will now be filing as part of a consolidated nexus return, and

establishes how those separate net operating losses shall be treated as part of

the consolidated nexus return.

      (a) Separate entity filers having a net

operating loss carryforward for the most recent period that began prior to

January 1, 2005, may carry that loss forward to the first return filed under

the nexus consolidated requirements pursuant to KRS 141.200(11), if:

      1. The separate return filer had nexus

for Kentucky corporation income tax purposes for the separate return periods

that generated the loss; and

      2. A supplemental statement as required

by paragraph (c) of this subsection of this subsection, is attached to the

return.

      (b) The net operating loss carryforward

shall be adjusted to a pre-apportionment amount unless an election has been

made to utilize the net operating loss carryforward as an apportioned amount.

      (c) A supplemental statement shall be

attached to the Kentucky consolidated return that reflects a breakdown of the

separate return loss carryforward amounts by entity.

      (4) Elective consolidated net loss

carryforward to a nexus consolidated return period. This subsection shall apply

if an elective consolidated filer who incurred net operating losses as a consolidated

group will now be filing as part of one or more consolidated nexus returns, and

establishes how those elective consolidated net operating losses shall be

treated for purposes of the consolidated nexus return.

      (a) An elective consolidated filer having

a net operating loss carryforward for the last elective consolidated return may

carry that loss forward to the first return filed under the nexus consolidated

requirements pursuant to KRS 141.200(11).

      (b) Any net operating loss carryforward

from the last return of an elective consolidated group shall be computed under

the provisions of Section 1502 of the Internal Revenue Code, 26 U.S.C. 1502 and

related federal regulations and be adjusted for the differences between KRS

Chapter 141 and the Internal Revenue Code.

      (c) The net operating loss carryforward

amount shall be on a pre-apportionment basis unless an election is made to carry

forward a post apportionment loss to be utilized in computing the current year

loss limitation.

      (d) If any of the corporations that filed

as part of the elective consolidated return did not have nexus with Kentucky

for the consolidated return periods that generated the net operating loss, that

corporation’s share of the net operating loss shall not be carried forward to a

nexus consolidated return.

      (e) If the election period defined in KRS

141.200(2)(e) has expired and the elective consolidated return group is

survived by one or more nexus consolidated groups, the requirements established

in this paragraph shall apply.

      1. Compute on a separate entity basis,

the pre-apportionment loss for each corporation that was included as part of

the consolidated net operating loss computation on the last return filed by the

elective consolidated group. The separate entity loss shall reflect adjustments

for the differences between KRS Chapter 141 and the Internal Revenue Code. A

columnar schedule shall be included with the consolidated return reflecting

this computation.

      2. The net operating loss carryforward

amount shall be on a pre-apportionment basis unless an election is made to

carry forward a post apportionment loss to be utilized in computing the current

year loss limitation.

      3. Each net operating loss corporation’s

share of the net operating loss carryforward shall be determined in the following

manner:

      a. Add all separate entity losses

together;

      b. Divide each separate entity loss

amount by the total of the separate entity losses; and

      c. Multiply the resultant percentage by

the consolidated net operating loss carryforward.

      4. Carry the loss carryforward amount

calculated in subparagraph 3c of this paragraph to the nexus consolidated

return in which the corporation is an includible corporation under the

provisions of KRS 141.200(9) through (14).

      (5) Elective consolidated net operating

loss carryforward to a separate return filer. This subsection shall apply if an

elective consolidated filer who has incurred net operating losses as a consolidated

group will now be filing separate entity returns, and establishes how those

elective consolidated net operating losses shall be treated for purposes of the

separate entity returns.

      (a) An elective consolidated filer having

a net operating loss carryforward for the last elective consolidated return may

carry that loss forward to separate returns filed pursuant to KRS 141.200(2)(c)

or 141.200(9)(g). The following requirements shall apply to this situation.

      1. Compute on a separate entity basis,

the post-apportionment Kentucky loss for each corporation that was included as

part of the consolidated net operating loss computation on the last return

filed by the elective consolidated group. The separate entity loss shall reflect

adjustments for the differences between KRS Chapter 141 and the Internal

Revenue Code. A columnar schedule shall be included with the consolidated

return and the separate corporation returns reflecting this computation.

      2. Each net operating loss corporation’s

share of the net operating loss carryforward shall be determined in the following

manner:

      a. Add all separate entity losses

together;

      b. Divide each separate entity loss

amount by the total of the separate entity losses;

      c. Multiply the resultant percentage by

the consolidated net operating loss carryforward; and

      d. Carry the separate entity loss

computed in clauses a to c of this subparagraph to the first separate return

due after the expiration of the elective consolidated return.

      (6) Nexus consolidated net operating loss

carryforward to a separate return period. This subsection shall apply if a

nexus consolidated filer ceases to exist who had incurred net operating losses

as a consolidated group, and will now be filing separate entity returns, and

establishes how those nexus consolidated net operating losses shall be treated

for purposes of the separate entity returns.

      (a) If a nexus consolidated filer ceases

to exist and a consolidated net operating loss carryforward exists, that net operating

loss carryforward may be carried forward to the separate returns filed pursuant

to KRS 141.200(2)(c) or 141.200(9)(g). The following requirements shall apply

to this situation.

      1. Compute on a separate entity basis,

the post-apportionment Kentucky loss for each loss corporation that was

included as part of the consolidated net operating loss computed on the last

return filed by the nexus consolidated group. The separate entity net operating

loss carryforward shall reflect adjustments for the differences between KRS

Chapter 141 and the Internal Revenue Code. A columnar schedule shall be

included with each separate corporation return reflecting this computation.

      2. Each net operating loss corporation's

share of the net operating loss carryforward shall be determined in the following

manner:

      a. Add all the separate entity computed

losses together;

      b. Divide each separate loss amount by

the total consolidated loss amount;

      c. Multiply the resultant percentage by

the consolidated net operating loss carryforward; and

      d. Carry the separate entity net

operating loss carryforward computed in clauses a to c of this subparagraph to

the first separate return due after the nexus consolidated group ceases to

exist.

      (7) Partnerships and limited liability

entities that are subject to the corporation income tax imposed by KRS 141.040

that are owned by corporations as defined by KRS 141.010(24) shall be allowed

to take a net operating loss deduction on their corporate income tax return for

taxable periods beginning on or after January 1, 2006 for net operating loss

carryforwards at the entity level.

 

      Section 3. This administrative regulation

shall apply to the computation of the net operating loss deduction of

corporations for taxable years beginning on or after January 1, 2005 except

where otherwise noted in this administrative regulation. (32 Ky.R. 1827; 33

Ky.R. 70; eff. 8-7-2006.)