86 Ill. Adm. Code 100.2410 — Net Operating Loss Carryovers for Individuals, and Capital Loss and Other Carryovers for All Taxpayers (IITA Section 203)

# Net Operating Loss Carryovers for Individuals, and Capital Loss and Other Carryovers for All Taxpayers (IITA Section 203)

TITLE 86: REVENUE CHAPTER I: DEPARTMENT OF REVENUE PART 100 INCOME TAX SECTION 100.2410 NET OPERATING LOSS CARRYOVERS FOR INDIVIDUALS, AND CAPITAL LOSS AND OTHER CARRYOVERS FOR ALL TAXPAYERS (IITA SECTION 203)

Section 100.2410 Net Operating Loss Carryovers for Individuals, and Capital Loss and Other Carryovers for All Taxpayers (IITA Section 203)

a) Scope. IITA Section 203 requires all taxpayers other than individuals to add back to their base income any carryover deduction taken in computing federal taxable income for a net operating loss incurred in a tax year ending prior to December 31, 1986. IITA Section 203(e) provides for adjustments to taxable income of taxpayers, other than individuals, related to deductions of net operating losses incurred in tax years ending prior to December 31, 1986. IITA Section 203(h) provides that, except as expressly provided by that subsection, there shall be no modifications or limitations on the amounts of income, gain, loss or deduction taken into account in determining gross income, adjusted gross income or taxable income for federal income tax purposes for the taxable year, or in the amount of such items entering into the computation of base income and net income. Accordingly, no taxpayer shall make any adjustment to, or otherwise increase or decrease, the amount properly allowed in computing adjusted gross income (for individuals) or taxable income (for all other taxpayers) on the taxpayer's federal income tax return for:

1) in the case of an individual, any net operating loss deduction carried over under IRC section 172; provided that (notwithstanding the amount of the federal net operating deduction claimed by the individual or allowed by the Internal Revenue Service), in order to prevent the double deduction of the same carryover as required by IITA Section 203(g) and Madison Park Bank v. Zagel, 97 Ill. App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982), the deduction properly allowed in computing federal adjusted gross income in a taxable year may not exceed the amount that reduces the taxpayer's taxable income for that year to zero, after making the modifications specified in IRC section 172(b)(2)(A), and therefore shall not include any amount available to carry over to other taxable years under IRC section 172(b)(2);

2) capital losses carried over under IRC section 1212;

3) deductions allowed to a partner under IRC section 704(d) for his distributive share of a partnership loss that exceeded the adjusted basis in his partnership interest as of the end of the tax year in which the loss was incurred;

4) deductions allowed to a shareholder under IRC section 1366(d)(2) for his share of a loss or deduction of a Subchapter S corporation that exceeded his adjusted basis in the stock or indebtedness of the Subchapter S corporation in the year the loss or deduction was incurred;

5) passive activity losses allocated to tax years subsequent to the year in which the loss was incurred under IRC section 469(b);

6) deductions for losses in excess of amounts at risk allocated to years subsequent to the year incurred under IRC section 465(a)(2); and 7) losses recognized as the result of adjustment events subsequent to a transaction governed by IRC section 338 and carried back pursuant to Treas. Reg. § 1.338(b)-3T(h)(2)(ii)(B).

b) Allocation and Apportionment of Deductions. 1) Deductions described in subsection (a) of this Section that are taken into account in a taxable year shall be allocated and apportioned according to the facts and circumstances of that taxable year. A taxpayer may request alternative apportionment of business losses or deductions by filing a petition pursuant to Section 100.3390 of this Part. Example 1: An individual incurs a federal net operating loss in 1995, when he is a nonresident. None of the individual's 1995 income is allocated or apportioned to Illinois. At the beginning of 1996, the individual moves to Illinois and becomes a resident. Any net operating loss carried forward from 1995 and deducted in computing the individual's 1996 federal adjusted gross income is allocated to Illinois pursuant to IITA Section 301(a), which in the case of a resident allocates to Illinois all items of income or deduction which were taken into account in the computation of base income for the taxable year. Example 2: A nonresident individual conducts a business as a sole proprietorship. During 1998, the individual apportions 20% of his business income from the proprietorship to Illinois pursuant to IITA Section 304(a). In 2000, the business is conducted entirely outside Illinois and has no Illinois apportionment factor. If the individual incurs net operating loss in 2000 from the sole proprietorship and carries the loss back to 1998, 20% of the loss will be apportioned to Illinois. Example 3: In 1999, a resident individual incurs a passive activity loss from rental of real estate located in Indiana. The individual's income from the property is nonbusiness income. At the beginning of 2000, the individual moves away from Illinois and becomes a nonresident. For federal income tax purposes, the individual is allowed to deduct the loss in 2000. Because the individual is not a resident, the deduction allowed in 2000 is allocated to Indiana under IITA Section 303(c)(1). Example 4: A nonresident individual incurs a federal net operating loss in 1995 from his investment in Partnership A. Partnership A has only business income. For 1995, Partnership A's Illinois apportionment factor under IITA Section 304 is 50%. For federal income tax purposes, the individual carries the net operating loss back to 1992. Partnership A's Illinois apportionment factor under IITA Section 304 is 25% for 1992. Accordingly, 25% of the individual's 1992 net operating loss is apportioned to Illinois. 2) Deductions arising in the same taxable year and subject to apportionment or allocation under different rules. When two or more deductions to which this Section applies arise in the same taxable year, but are apportioned or allocated under different rules, the amount of each such deduction carried over from that year shall be in proportion to the total of all such deductions arising in that year, and the amount of each such deduction allowed in a carryover year shall be in proportion to the total amount of such deductions carried over to that year from the same taxable year. Example 5: In 2000, Corporation A engages in three capital transactions. In the first, it realizes $700 in capital gain, which is characterized as business income. In the second, it incurs $400 in capital loss, which is characterized as business income from the same business as the gain in the first transaction. In the third, it incurs $600 in capital loss on real property located in Illinois, which is characterized as nonbusiness income allocable entirely to Illinois. Corporation A's apportionment factor in 2000 is 20%. On its federal income tax return for 2000, Corporation A reports net capital gain of zero, because corporations are not allowed to deduct capital losses in excess of capital gains. In actuality, it is allowed to deduct $700 in capital losses and carry over $300 to be deducted in another year. In 2000, Corporation A is treated as deducting $280 in business loss from the second transaction ($400 in loss, divided by the $1,000 in total capital losses, multiplied by the $700 capital loss deduction allowed) and $420 in nonbusiness capital loss ($600 in loss, divided by $1,000, and multiplied by $700). The $280 in business loss would be combined with Corporation A's other business income, and 20% would be apportioned to Illinois. The entire $420 in nonbusiness capital loss will be allocated to Illinois. If Corporation A carries the $300 excess loss back to offset $200 in capital gains realized in 1997, $80 of the 1997 deduction will be business loss (the $120 excess loss attributable to the business transaction, divided by the entire $300 in excess loss, times $200) and $120 will be nonbusiness loss ($180 divided by $300, times $200). The $80 of business loss will be combined with Corporation A's other business income from 1997 and apportioned according to Corporation A's 1997 apportionment factor. The entire $120 in nonbusiness loss will be allocated to Illinois. Example 6: Assume the same facts as in Example 5, except that the $600 nonbusiness capital loss was incurred on the sale of an intangible asset, and so is allocated to the commercial domicile of Corporation A. At the time the loss was realized in 2000, Corporation A's commercial domicile was in State X, so the $420 in nonbusiness capital loss deducted in that year would be allocated to State X. However, in 1997, Corporation A's commercial domicile was in Illinois. The $120 in nonbusiness capital loss deducted in 1997 would be allocated entirely to Illinois, because that is the commercial domicile of Corporation A at the time the deduction is taken. Example 7: In 2002, Taxpayer, a nonresident individual, has $20,000 in federal net losses from Partnership A and $180,000 in net losses from Partnership B. Taxpayer has $100,000 in income from other sources, and so Taxpayer's adjusted gross income for 2002 is a net operating loss of $100,000. Taxpayer carries the entire $100,000 loss back to 2000, when Partnership A's Illinois apportionment factor is 30% and Partnership B's apportionment factor is zero. In determining Taxpayer's Illinois net income for 2000, 10% of the federal net operating loss carryback ($20,000 loss from Partnership A divided by $200,000 in total losses incurred from partnerships in 2002), $3,000 of the net operating loss deduction in 2000 is apportioned to Illinois (Partnership A's 30% apportionment factor times the 10% of the $100,000 federal net operating loss carryback attributable to Partnership A's loss). The remaining 90% of the net operating loss deduction is from Partnership B, and none of that loss is apportioned to Illinois.

c) Special Issues.

1) Taxpayers with taxable income (adjusted gross income, in the case of an individual) that is less than zero for a taxable year may offset such negative amount against any net addition modifications for the taxable year, but only to the extent the negative income has not been carried back to and deducted in any prior taxable year as a loss or deduction governed by this Section. (See IITA Section 203(g) (prohibiting double deductions) and Madison Park Bank v. Zagel, 97 Ill. App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982).) The sum of carryover deductions taken in all years, plus the net addition modifications offset against the loss in the year incurred, may not exceed the amount of the loss. Notwithstanding subsection (a) of this Section, whenever a carryover deduction taken in any year plus the net addition modifications offset against a loss in the year incurred plus all carryover deductions of that loss allowed in prior years exceeds the loss incurred, such excess must be added back. Example 8: In 1996, an individual's adjusted gross income is a loss of $10,000, $5,000 of which the taxpayer carries back to prior years as federal net operating loss deductions. The individual's 1996 addition modifications exceed his subtraction modifications by $7,000. The individual's base income for 1996 is $2,000 (negative $10,000 in adjusted gross income, reduced by the $5,000 carried back to prior years, plus $7,000 in net addition modifications). The taxpayer has used up all of the loss and, for Illinois income tax purposes, may not carry any of the loss forward. Any carryforward deduction claimed for the 1996 loss in a subsequent year must be added back.

2) Any change in federal taxable income (adjusted gross income, in the case of an individual) that results from a deduction or change in the amount of a deduction of an item governed by this Section is a federal change subject to the reporting requirements of IITA Section 506(b).

3) Net loss carryforwards under IITA Section 207. The allocation of losses under this Section can result in a nonresident's net income being less than zero. Under IITA Section 207, a taxpayer (other than an individual, to whom IITA Section 207 does not apply) may carry over any Illinois net loss resulting from the allocation of losses under this Section to other taxable years. Example 9: For federal income tax purposes, a corporation partially offsets a $100,000 nonbusiness capital gain allocated to Missouri with a $70,000 nonbusiness capital loss carryforward allocated to Illinois. If the corporation has no other income and no Illinois modifications, it would have base income of $30,000, but would allocate a $70,000 loss to Illinois. The resulting negative net income computed under IITA Section 207 may be carried over pursuant to that provision. Example 10: For federal income tax purposes, a nonresident individual has positive adjusted gross income for a taxable year. For that year, the individual has $200,000 in base income from sources outside Illinois and a $20,000 loss, all of which is allocable to Illinois. The individual's Illinois net income for the year is therefore less than zero. Because IITA Section 207 does not apply to individuals, and there is no other provision for carryovers of losses or deductions, the individual may not carry that negative amount over to any other taxable year. (Source: Added at 28 Ill. Reg. 1378, effective January 12, 2004)

Section 100.2410 Net Operating Loss Carryovers for Individuals, and Capital Loss and Other Carryovers for All Taxpayers (IITA Section 203)

a) Scope. IITA Section 203 requires all taxpayers other than individuals to add back to their base income any carryover deduction taken in computing federal taxable income for a net operating loss incurred in a tax year ending prior to December 31, 1986. IITA Section 203(e) provides for adjustments to taxable income of taxpayers, other than individuals, related to deductions of net operating losses incurred in tax years ending prior to December 31, 1986. IITA Section 203(h) provides that, except as expressly provided by that subsection, there shall be no modifications or limitations on the amounts of income, gain, loss or deduction taken into account in determining gross income, adjusted gross income or taxable income for federal income tax purposes for the taxable year, or in the amount of such items entering into the computation of base income and net income. Accordingly, no taxpayer shall make any adjustment to, or otherwise increase or decrease, the amount properly allowed in computing adjusted gross income (for individuals) or taxable income (for all other taxpayers) on the taxpayer's federal income tax return for:

1) in the case of an individual, any net operating loss deduction carried over under IRC section 172; provided that (notwithstanding the amount of the federal net operating deduction claimed by the individual or allowed by the Internal Revenue Service), in order to prevent the double deduction of the same carryover as required by IITA Section 203(g) and Madison Park Bank v. Zagel, 97 Ill. App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982), the deduction properly allowed in computing federal adjusted gross income in a taxable year may not exceed the amount that reduces the taxpayer's taxable income for that year to zero, after making the modifications specified in IRC section 172(b)(2)(A), and therefore shall not include any amount available to carry over to other taxable years under IRC section 172(b)(2);

2) capital losses carried over under IRC section 1212;

3) deductions allowed to a partner under IRC section 704(d) for his distributive share of a partnership loss that exceeded the adjusted basis in his partnership interest as of the end of the tax year in which the loss was incurred;

4) deductions allowed to a shareholder under IRC section 1366(d)(2) for his share of a loss or deduction of a Subchapter S corporation that exceeded his adjusted basis in the stock or indebtedness of the Subchapter S corporation in the year the loss or deduction was incurred;

5) passive activity losses allocated to tax years subsequent to the year in which the loss was incurred under IRC section 469(b);

6) deductions for losses in excess of amounts at risk allocated to years subsequent to the year incurred under IRC section 465(a)(2); and

7) losses recognized as the result of adjustment events subsequent to a transaction governed by IRC section 338 and carried back pursuant to Treas. Reg. § 1.338(b)-3T(h)(2)(ii)(B).

b) Allocation and Apportionment of Deductions.

1) Deductions described in subsection (a) of this Section that are taken into account in a taxable year shall be allocated and apportioned according to the facts and circumstances of that taxable year. A taxpayer may request alternative apportionment of business losses or deductions by filing a petition pursuant to Section 100.3390 of this Part.

Example 1: An individual incurs a federal net operating loss in 1995, when he is a nonresident. None of the individual's 1995 income is allocated or apportioned to Illinois. At the beginning of 1996, the individual moves to Illinois and becomes a resident. Any net operating loss carried forward from 1995 and deducted in computing the individual's 1996 federal adjusted gross income is allocated to Illinois pursuant to IITA Section 301(a), which in the case of a resident allocates to Illinois all items of income or deduction which were taken into account in the computation of base income for the taxable year.

Example 2: A nonresident individual conducts a business as a sole proprietorship. During 1998, the individual apportions 20% of his business income from the proprietorship to Illinois pursuant to IITA Section 304(a). In 2000, the business is conducted entirely outside Illinois and has no Illinois apportionment factor. If the individual incurs net operating loss in 2000 from the sole proprietorship and carries the loss back to 1998, 20% of the loss will be apportioned to Illinois.

Example 3: In 1999, a resident individual incurs a passive activity loss from rental of real estate located in Indiana. The individual's income from the property is nonbusiness income. At the beginning of 2000, the individual moves away from Illinois and becomes a nonresident. For federal income tax purposes, the individual is allowed to deduct the loss in 2000. Because the individual is not a resident, the deduction allowed in 2000 is allocated to Indiana under IITA Section 303(c)(1).

Example 4: A nonresident individual incurs a federal net operating loss in 1995 from his investment in Partnership A. Partnership A has only business income. For 1995, Partnership A's Illinois apportionment factor under IITA Section 304 is 50%. For federal income tax purposes, the individual carries the net operating loss back to 1992. Partnership A's Illinois apportionment factor under IITA Section 304 is 25% for 1992. Accordingly, 25% of the individual's 1992 net operating loss is apportioned to Illinois.

2) Deductions arising in the same taxable year and subject to apportionment or allocation under different rules. When two or more deductions to which this Section applies arise in the same taxable year, but are apportioned or allocated under different rules, the amount of each such deduction carried over from that year shall be in proportion to the total of all such deductions arising in that year, and the amount of each such deduction allowed in a carryover year shall be in proportion to the total amount of such deductions carried over to that year from the same taxable year.

Example 5: In 2000, Corporation A engages in three capital transactions. In the first, it realizes $700 in capital gain, which is characterized as business income. In the second, it incurs $400 in capital loss, which is characterized as business income from the same business as the gain in the first transaction. In the third, it incurs $600 in capital loss on real property located in Illinois, which is characterized as nonbusiness income allocable entirely to Illinois. Corporation A's apportionment factor in 2000 is 20%.

On its federal income tax return for 2000, Corporation A reports net capital gain of zero, because corporations are not allowed to deduct capital losses in excess of capital gains. In actuality, it is allowed to deduct $700 in capital losses and carry over $300 to be deducted in another year.

In 2000, Corporation A is treated as deducting $280 in business loss from the second transaction ($400 in loss, divided by the $1,000 in total capital losses, multiplied by the $700 capital loss deduction allowed) and $420 in nonbusiness capital loss ($600 in loss, divided by $1,000, and multiplied by $700). The $280 in business loss would be combined with Corporation A's other business income, and 20% would be apportioned to Illinois. The entire $420 in nonbusiness capital loss will be allocated to Illinois.

If Corporation A carries the $300 excess loss back to offset $200 in capital gains realized in 1997, $80 of the 1997 deduction will be business loss (the $120 excess loss attributable to the business transaction, divided by the entire $300 in excess loss, times $200) and $120 will be nonbusiness loss ($180 divided by $300, times $200). The $80 of business loss will be combined with Corporation A's other business income from 1997 and apportioned according to Corporation A's 1997 apportionment factor. The entire $120 in nonbusiness loss will be allocated to Illinois.

Example 6: Assume the same facts as in Example 5, except that the $600 nonbusiness capital loss was incurred on the sale of an intangible asset, and so is allocated to the commercial domicile of Corporation A. At the time the loss was realized in 2000, Corporation A's commercial domicile was in State X, so the $420 in nonbusiness capital loss deducted in that year would be allocated to State X. However, in 1997, Corporation A's commercial domicile was in Illinois. The $120 in nonbusiness capital loss deducted in 1997 would be allocated entirely to Illinois, because that is the commercial domicile of Corporation A at the time the deduction is taken.

Example 7: In 2002, Taxpayer, a nonresident individual, has $20,000 in federal net losses from Partnership A and $180,000 in net losses from Partnership B. Taxpayer has $100,000 in income from other sources, and so Taxpayer's adjusted gross income for 2002 is a net operating loss of $100,000. Taxpayer carries the entire $100,000 loss back to 2000, when Partnership A's Illinois apportionment factor is 30% and Partnership B's apportionment factor is zero. In determining Taxpayer's Illinois net income for 2000, 10% of the federal net operating loss carryback ($20,000 loss from Partnership A divided by $200,000 in total losses incurred from partnerships in 2002), $3,000 of the net operating loss deduction in 2000 is apportioned to Illinois (Partnership A's 30% apportionment factor times the 10% of the $100,000 federal net operating loss carryback attributable to Partnership A's loss). The remaining 90% of the net operating loss deduction is from Partnership B, and none of that loss is apportioned to Illinois.

c) Special Issues.

1) Taxpayers with taxable income (adjusted gross income, in the case of an individual) that is less than zero for a taxable year may offset such negative amount against any net addition modifications for the taxable year, but only to the extent the negative income has not been carried back to and deducted in any prior taxable year as a loss or deduction governed by this Section. (See IITA Section 203(g) (prohibiting double deductions) and Madison Park Bank v. Zagel, 97 Ill. App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982).) The sum of carryover deductions taken in all years, plus the net addition modifications offset against the loss in the year incurred, may not exceed the amount of the loss. Notwithstanding subsection (a) of this Section, whenever a carryover deduction taken in any year plus the net addition modifications offset against a loss in the year incurred plus all carryover deductions of that loss allowed in prior years exceeds the loss incurred, such excess must be added back.

Example 8: In 1996, an individual's adjusted gross income is a loss of $10,000, $5,000 of which the taxpayer carries back to prior years as federal net operating loss deductions. The individual's 1996 addition modifications exceed his subtraction modifications by $7,000. The individual's base income for 1996 is $2,000 (negative $10,000 in adjusted gross income, reduced by the $5,000 carried back to prior years, plus $7,000 in net addition modifications). The taxpayer has used up all of the loss and, for Illinois income tax purposes, may not carry any of the loss forward. Any carryforward deduction claimed for the 1996 loss in a subsequent year must be added back.

2) Any change in federal taxable income (adjusted gross income, in the case of an individual) that results from a deduction or change in the amount of a deduction of an item governed by this Section is a federal change subject to the reporting requirements of IITA Section 506(b).

3) Net loss carryforwards under IITA Section 207. The allocation of losses under this Section can result in a nonresident's net income being less than zero. Under IITA Section 207, a taxpayer (other than an individual, to whom IITA Section 207 does not apply) may carry over any Illinois net loss resulting from the allocation of losses under this Section to other taxable years.

Example 9: For federal income tax purposes, a corporation partially offsets a $100,000 nonbusiness capital gain allocated to Missouri with a $70,000 nonbusiness capital loss carryforward allocated to Illinois. If the corporation has no other income and no Illinois modifications, it would have base income of $30,000, but would allocate a $70,000 loss to Illinois. The resulting negative net income computed under IITA Section 207 may be carried over pursuant to that provision.

Example 10: For federal income tax purposes, a nonresident individual has positive adjusted gross income for a taxable year. For that year, the individual has $200,000 in base income from sources outside Illinois and a $20,000 loss, all of which is allocable to Illinois. The individual's Illinois net income for the year is therefore less than zero. Because IITA Section 207 does not apply to individuals, and there is no other provision for carryovers of losses or deductions, the individual may not carry that negative amount over to any other taxable year.

# Source

(Source: Added at 28 Ill. Reg. 1378, effective January 12, 2004)