Effect of NOL on allowable deductions

[Golden Rocket]

Assume a C corp has profits and taxable income for a particular year. This means they are entitled to deductions such as a charity and manufacturers' 9% deduction to apply against taxable income, and thus these items become part of the taxable income calculation.

However, assume also that the taxable income for the year is totally wiped out by a large NOL carryforward. Does the allowability of the charitable deduction and the manufacturer's deduction get calculated PRIOR TO or AFTER the NOL?

[Roland Slugg]

It depends on whether the NOL deduction is from an NOL that arose in an earlier year and is being carried over to the current tax year, or if the NOL arose in a later year and is being carried back to an earlier year. It appears you are asking about the effect of an NOL deduction in the current year from a loss incurred in an earlier year.

Both the 10% charitable contribution as well as the 9% DPAD are based on taxable income (figured without their own deduction), so an NOL carryover deduction that reduces a corporation's taxable income to zero wipes out both of those deductions. Any unused charitable contributions, however, may, in turn, be carried over to the succeeding five tax years. There is no carryover allowed for any unused DPAD.

An NOL deduction carried back to an earlier year does NOT affect the charitable contribution limitation for that earlier year. I don't know if the DPAD deduction in an earlier year is similarly unaffected.

An NOL deduction also affects a corporation's dividends received deduction, so if your client has dividend income, you should check the rules about that.

[Snaggletooth]

Thanks

Sounds like you have a good handle on this issue, Roland. Thanks.