1120-US: Carryover from the disallowed portion of nondeductible, noncapitalized expenses (FAQ)

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Question

Will UltraTax/1120 carryover the disallowed portion of nondeductible, noncapitalized expenses when the election under Regulation 1.1367-1(g) is not made?

Answer

Under IRC section 1366(d)(2)(A), any loss or deduction that is disallowed due to lack of basis transfers to the succeeding taxable year. The items that decrease basis and are subject to carryover in the following year are listed in IRC section 1367(a)(2)(A) through (E). However, only IRC section 1367(a)(2)(B) and (C) use the terms loss or deduction when describing separately and nonseparately stated items. IRC section 1367(a)(2)(D) describes a nondeductible, noncapitalizable item as an expense.

Therefore, the wording of the code suggests nondeductible, noncapitalizable items are not subject to carryover provisions because they are items of expense, rather than items of loss or deduction.

However, if the shareholder makes the election to reduce basis by losses or deductions before nondeductible expenses, the shareholder must agree to carryover the nondeductible items to succeeding years.

If you believe nondeductible, noncapitalizable items should not carryover to the following year when the shareholder has not made the election under Regulation 1.1367-1(g), mark the Suppress proforma of nondeductible expenses field for the respective shareholder in the View > Shareholder Information > Other Info > Shareholder Basis > Suspended Losses tab. UltraTax CS will proforma this checkbox selection in the following year.

Related topic: 1120-US: Shareholder basis calculations FAQs

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