1040-IN: NOL deduction - Applying prior-year NOL to current-year income

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Overview

A net operating loss, as calculated on a prior-year Indiana return via Schedule IT-40NOL and transferred forward to the current year, may be applied against current-year Indiana Adjusted Gross Income (as defined by Indiana tax law) and reported as a deduction on the current-year return. To determine the amount of net operating loss deduction to claim on the current-year Indiana return, the state of Indiana requires its own calculations, separate from federal NOL calculations. When claiming the deduction, taxpayers must determine the portion of prior year NOLs that has already been applied to Indiana AGI in prior years. Taxpayers must also submit a copy of Schedule IT-40NOL for each applicable loss year for which a deduction is claimed on the current year return.

Data entry

For resident returns for tax years 2004 or later, starting with the original loss year, use the Income statement dialog on Screen INNOL-2 to enter all applicable components of income. Include information in the appropriate statement dialog(s) for all loss years and all intervening year(s). UltraTax CS proformas information from the prior-year version of UltraTax CS to Screen INNOL-2. If UltraTax CS was not used to prepare the prior-year return, enter the following amounts for each year, as applicable:

Note: If the taxpayer had an Indiana net operating loss in a prior year, a properly prepared Indiana Form IT-40 return for that loss year will include Form 1045, Schedule A-NOL (recalculated under Indiana law), Schedule IT-40NOL for that loss year, and, if applicable, add-back and deduction schedules.

If the taxpayer and spouse are taxed separately for county tax purposes, see Taxpayer and spouse amounts.

How UltraTax CS uses the Information on Screen INNOL-2

UltraTax/1040-IN uses information on Screen INNOL-2 for the following purposes:

In addition, the NOL carryover worksheets show the calculation of current year Indiana AGI when a prior-year loss carryforward is being applied against current-year income.

In the Adjust and Income statement dialogs on Screen INNOL-2, certain components of income from the fieldview are used solely for determining whether or not taxpayer had an Indiana NOL during the tax year. Other components of income are used solely for determining Indiana AGI for the tax year. And, some components are used for both purposes. Thus, if a taxpayer has an Indiana net operating loss carryforward from prior year(s), it is important to enter all components of income for each loss year and each intervening year to determine Indiana AGI and/or Indiana net operating loss for each year. If the Indiana return was prepared in last year’s version of UltraTax CS, the pertinent information proformas to Screen INNOL-2.

Order in Which NOL Must be Applied

Per guidance from the Indiana Department of Revenue, Indiana requires any NOL carryover amounts to be used as soon as there is Indiana AGI available to absorb them. A taxpayer may not skip a year. For example, if the taxpayer has loss carryforward from 2014, positive income in 2015, and positive income in 2016, the loss must be applied first to 2015, then to 2016. Thus, UltraTax CS calculates prior year NOL carryforward available to 2017 according to the assumptions and expectations of properly prepared prior-year returns.

Resubmission of Schedule IT-40NOL Required

The Indiana Department of Revenue requires taxpayers to show calculations of net operating loss in the year the loss was incurred as well as in the year to which the carryover amounts are applied (year in which NOL deduction is claimed). For example, if an NOL deduction for a loss from tax year 2012 is being applied to offset income in tax year 2017, the expectation is that Schedule IT-40NOL for loss year 2012 was included when the 2012 return was filed and that Schedule IT-40NOL for loss year 2012 will be included again when filing the 2017 return. Thus, based on data entry on Screen INNOL-2, for resident returns, UltraTax CS calculates a reproduction of Schedule IT-40NOL for the loss year to determine the amount which is to be applied as a Schedule 2 deduction against current year Indiana AGI.

Federal NOL Deduction may Not be Claimed on Indiana Return

As Indiana requires its own calculations for net operating losses, any deduction to federal AGI for federal NOL carryover (claimed on federal Form 1040, line 21) is reported on Schedule 1 of the Indiana resident return as an add-back to federal AGI for purposes of determining Indiana AGI and Indiana taxable income.

NOL Carryforward is Applied Against Indiana Adjusted Gross Income, not Indiana Taxable Income

In some cases, upon initial review it appears that NOL carryforward instead of current-year deductions is being used unnecessarily to offset current-year income. A subtle but important point is that Indiana net operating loss carryforward is applied against Indiana Adjusted Gross Income, not Indiana Taxable Income. Typically, Indiana Adjusted Gross Income (as defined by Indiana tax law) is greater than Indiana taxable income. However, an amount for Indiana Adjusted Gross Income does not actually appear on Indiana Form IT-40. [There is an amount for Indiana Adjusted Income on the resident return, but no amount for Indiana Adjusted Gross Income.] Thus, the amount for Indiana AGI is computed via the NOL carryover worksheets; then the NOL carryforward amount is applied against Indiana AGI (not taxable income). Note that there are several deductions that are used to determine Indiana Taxable Income but are not used to determine Indiana Adjusted Gross Income.

Prior year Indiana AGI amounts are calculated based on data entry on Screen INNOL-2. Current-year Indiana AGI amount is calculated based on data entry for the current-year federal and Indiana returns.

Note: In certain scenarios, deductions that are not part of the Indiana definition of AGI could effectively be unused. For example, the renter’s deduction is figured into the computation of Indiana taxable income but not into the computation of Indiana AGI. On the assumption that all other factors in this scenario are equal, Indiana AGI will exceed Indiana taxable income. Hence, if the carryforward amount is sufficient, the amount of NOL carryforward to apply to current year income could equal Indiana AGI, not Indiana taxable income. Thus, the amount of NOL deduction used on the current year return may be higher than expected if not taking this rule into consideration. The NOL carryforward amount to next year may be lower than expected. If the NOL carryforward amount from prior year exceeds current-year Indiana AGI, the renter’s deduction effectively goes unused.

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