(§ 11-602(8)(f), Administrative Code.)
(a) A deduction similar to that allowed under § 172 of the Internal Revenue Code may be allowable in computing entire net income for the purposes of Subchapter 2 of Chapter 6 of Title 11. For New York City tax purposes, as for Federal tax purposes, except as provided in subdivision (b) of this section, a net operating loss may be carried back to each of the three taxable years preceding the year in which the loss was sustained, and may be carried forward to each of the five following taxable years. The New York City net operating loss deduction is presumably the same as that allowed for Federal tax purposes, subject to three limitations explained hereunder.
(b) One of these limitations is that no deduction is allowable for a loss sustained during any taxable year in which the taxpayer was not subject to tax under Subchapter 2 of Chapter 6 of Title 11.
Example 1: A corporation is incorporated in Pennsylvania in January, 1967. During the taxable year 1967, it sustains an operating loss of $10,000. In January, 1968, it begins to do business in New York City. For the taxable year 1968, it has entire net income of $10,000. No deduction is allowed for any part of the loss sustained in 1967, since the corporation was not subject to New York City General Corporation Tax in 1967.
(c) Another limitation on the New York City net operating loss deduction is that any net operating loss which may be carried back or forward for Federal tax purposes must be adjusted to reflect the additions and subtractions required by 19 RCNY § 11-27 above.
Example 2: For the calendar year 1969, a taxpayer has Federal gross income of $400,000, including $100,000 dividends from nonsubsidiary corporations, and it has deductible operating expenses of $400,000, including $5,000 New York franchise tax and $5,000 New York City General Corporation Tax. Its Federal net operating loss is $85,000 and its New York City net operating loss is $40,000, computed as follows:
Federal | ||
Gross income | $400,000 | |
Less operating expense | $400,000 | |
Taxable income before special deductions | 0 | |
Less special dividends – received deduction | $85,000 | |
Net operating loss | ($85,000) | |
New York City | ||
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
50 percent of dividends received | $50,000 | |
New York City net operating loss | ($40,000) | |
Example 3: If the dividends in example 2 were from subsidiaries, the New York City net operating loss would be $90,000, computed as follows:
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
Dividends from subsidiaries | $100,000 | |
New York City net operating loss | ($90,000) | |
(d) The third limitation on the New York City net operating loss deduction is that in any year it may not exceed the deduction allowable for that year for Federal tax purposes under § 172 of the Internal Revenue Code.
Example 4: If the taxpayer in example 3 in 1966 and 1967 had Federal gross income of $500,000, including $100,000 of dividends from subsidiary corporations and expenses of $350,000 including New York franchise taxes of $5,000 and New York City General Corporation Tax of $5,000, its Federal and City net operating loss deductions will be $65,000 in 1966 and $20,000 in 1967, computed as follows:
Federal
1966 | ||
Gross income | $500,000 | |
Expense | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
Net operating loss deduction (out of total Federal loss for 1969 of $85,000) | $65,000 | |
Taxable income | 0 | |
1967 | ||
Gross income | $500,000 | |
Expenses | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
1969 operating loss carry-back | $85,000 | |
Less amount deducted in 1966 | $65,000 | |
Net operating loss deduction | $20,000 | |
Taxable income | $45,000 | |
New York City
1966 | ||
Federal taxable income | 0 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deduction | $65,000 | $160,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (out of total New York City loss for 1969 of $90,000) | $65,000 | |
Entire net income (loss) | ($5,000) | |
1967 | ||
Federal taxable income | $45,000 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deductions | $20,000 | $115,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (the unused balance of the New York City loss of $90,000 for 1969 – see example 3, supra – would be $25,000, but the New York City deduction may not exceed the Federal deduction | $20,000 | |
Entire net income | $40,000 | |
Since allowance of the net operating loss deduction in 1966 results in a net loss for the carry-back year, the taxpayer will be subject to tax for that year on one of the alternative bases mentioned in 19 RCNY § 11-23, supra. It should be noted that the $5,000 loss shown above may be subtracted in determining the base of the alternative tax measured by entire net income plus compensation paid to officers and stockholders (See: 19 RCNY § 11-34, infra). It may not, however, be carried back or forward to any other year as a net operating loss deduction. Although deductions totaling only $85,000 are allowed for 1966 and 1967 on account of the $95,000 loss sustained in 1969, the $10,000 balance cannot be carried forward to any year subsequent to 1967. Because, for Federal tax purposes, the entire amount of the 1969 loss has been used up in the 1966 and 1967 deductions, no Federal deductions will be allowable in any other year, and the New York City deduction for any year can never exceed the Federal deduction.
Example 5: In 1969 a corporation has a Federal net operating loss of $10,000 and a New York City net operating loss of $8,000. The corporation is allowed a Federal deduction of $10,000 for said loss in 1966. In 1966 its New York City General Corporation Tax was computed on the mill tax basis (see: 19 RCNY § 11-35, infra). There was, thus, no income base for the 1966 City General Corporation Tax against which the 1969 New York City operating loss can be applied. Nor can any New York City deduction on account of this loss be allowed in 1967 or any other year since (a) the Federal deduction on account of the loss was wholly allowed for 1966, (b) it was allowed in no part for any other year, and (c) the New York City deduction can never exceed the Federal deduction.
(e) The fact that a net operating loss is carried back or forward as a deduction in some other year does not prevent its use in computing, for the year in which the loss was sustained, the tax measured by entire net income plus compensation paid to officers and stockholders (see: 19 RCNY § 11-34, infra).
Example 6: In 1969 a corporation paid salaries of $30,000 to its officers and stockholders and sustained a New York City net operating loss of $10,000 for which it is allowed a deduction of the same amount against its entire net income for 1966. Such net operating loss would nevertheless be taken into consideration in computing the third alternative tax for 1969, as follows:
Salaries minus $15,00 | $15,000 |
Net operating loss | $10,000 |
$5,000 | |
30 percent of such balance | $1,500 |
Tax at 5 1/2 percent | $82.50 |
(f) (1) In the case of a corporation which reports for New York City General Corporation Tax purposes on a combined basis with one or more related corporations, either in the year in which a net operating loss is sustained or in the year in which a deduction is claimed on account of such loss, the allowance of such deduction is subject to the same limitations which would apply for purposes of the Federal income tax if such corporation had filed for such year a consolidated Federal income tax return with the same related corporations. These limitations apply to allowance of the New York City net operating loss deduction regardless of whether in fact such corporation, for Federal income tax purposes, filed an individual or a consolidated return.
(2) In general, any carry-back or carry-over from a year in which a combined report was filed (for New York City General Corporation Tax purposes) must be based upon the combined net operating loss of the group of corporations filing such report. The portion of such combined loss attributable to any member of the group which files a separate report for a preceding or succeeding taxable year will be an amount bearing the same relation to the combined loss as the net operating loss of such corporation bears to the total net operating losses of all members of the group having such losses, to the extent that they were taken into account in computing the combined net operating loss.
Example 7: In 1966, X Corp. filed a separate New York City General Corporation Tax report showing entire net income of $20,000 and also filed a separate Federal income tax return showing Federal taxable income of the same amount. In 1969, it filed a separate Federal return showing a net operating loss of $10,000 but joined with Y Corp. and Z Corp. in filing a combined New York City General Corporation Tax report showing the following:
X Corp. – net operating loss | ($10,000) |
Y Corp. – net operating loss | ($20,000) |
Z Corp. – entire net income | $15,000 |
Combined net operating loss | ($15,000) |
For New York City General Corporation Tax purposes, the deduction allowable to X Corp. against its 1966 income must be based upon the combined net operating loss shown above, and the portion of the combined loss attributable to X Corp. is one-third thereof or $5,000. This is because the net operating loss of X Corp. was one-third of the total net operating losses of all members of the combined group having such losses (X Corp., $10,000 and Y Corp., $20,000).