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Revenue Administrative Bulletin 1989-60
Revenue Administrative Bulletin 1989-60
INCOME TAX – REPORTING AND UTILIZING A NET OPERATING LOSS FOR MICHIGAN INCOME TAX AND HOUSEHOLD INCOME PURPOSE
Approved: Oct 2, 1989
RAB-89-60 This Bulletin describes how a net operating loss (NOL) is used and reported for Michigan income tax and household income purposes.
The Michigan Income Tax Act provides for a net operating loss. A net operating loss is the excess of allowable deductions over gross income, subject to certain adjustments. The most common reason for the appearance of a net operating loss is a loss from the operation of a business. However a net operating lose my also be cause by excess employee deductions or deductions taken for casualty and theft losses.
Michigan Income Tax Treatment
In 1987 the Michigan Income Tax Act was amended by Public Act Number 254 to limit the statutory net operating loss deduction in calculating Michigan taxable income. The amendment added subsections (p) and (q) to section 30 of the Act, MCL 206.30(1)(p) and (q). These subsections provide:
(p) Add to the extent deducted in determining federal adjusted gross income the net operating loss deduction under section 172 of the internal revenue code.
(q) Deduct a net operating loss deduction for the taxable year as defined in section 172 of the internal revenue code subject to modifications under section 172(b)(2) of the internal revenue code and subject to the allocation and apportionment provisions of chapter 3 of this act for the taxable year in which the loss was incurred.
To calculate Michigan taxable income a taxpayer must begin with “adjusted gross income” as defined in the Internal Revenue Code. [MCL 206.30(1)] Assuming there are no modifications to adjusted gross income other than a net operating loss, the taxpayer would add the federal net operating loss deduction back to the adjusted gross income. [MCL 206.31(1)(p)] After this add-back, the taxpayer will subtract a net operating loss deduction for the taxable year with modifications as required in the Internal Revenue Code under section 172(b)(2). These modifications include adjustments for personal exemptions, itemized deductions, capital gains and capital losses, etc. The result of this calculation is federal modified taxable income.
Once this calculation is made, then a taxpayer must apply the allocation and apportionment provisions of the Michigan Income Tax Act to the lesser of the federal net operating loss deduction or federal modified taxable income to arrive at the Michigan net operating loss deduction. The allocation and apportionment provisions (of Chapter 3) constitute the basis for the disallowance of that portion of the net operating loss that is attributable to activities outside of Michigan.
Allocation and Apportionment
If any portion of the federal net operating loss is attributable to business activity that is taxable both within and without the State, then the operating loss must be allocated and apportioned as indicated above. The ratio of the taxpayer’s net out-of-state income and losses that are included in adjusted gross income to the federal net operating loss is applied to the net operating loss deduction allowable in each carryback or carryover year with the result added back on the Michigan return.
Special Limitations
The deduction of a net operating loss for Michigan income tax purposes may never be greater than the net operating loss deduction computed for federal purposes. A taxpayer who is not a resident of Michigan may not create a net operating loss for Michigan purposes if a net operating loss does not exist for federal purposes. The Department does not allow a deduction of a net operating loss either greater than the net operating loss itself or the federal modified taxable income. In carryback and carryover years, the deduction of a net operating loss is limited to federal modified taxable income computed for those years.
Carryback and Carryover of Net Operating Loss
A net operating loss may be carried back three years and carried over to each of the 15 subsequent years until the loss is completely offset. A taxpayer may also elect to forgo a carryback and elect to carry over the net operating loss for the 15 subsequent years. [See Internal Revenue Code Section 172(b)(1)(A) and (B).] A Michigan taxpayer must carry back or over the net operating loss to the same years as was elected for federal purposes.
Reporting Requirements and Forms
A Michigan taxpayer claiming a net operating loss deduction created by a carryback of net operating loss or computing a net operating loss carryover must complete form MI-1045 APPLICATION FOR NET OPERATING LOSS REFUND and attach the form to the MI-1040. This form and instructions explain how to compute a net operating loss, federal modified taxable income in the year the net operating loss deduction is taken, a refund for a carryback year and a net operating loss carryover.
To expedite the review of tax returns reflecting a net operating loss, the Department requests that taxpayers attach copies of the federal forms 1045, 1040, and Schedule A, and any other pertinent form or data related to calculating the net operating loss.
The Michigan form 1045 and instructions may be obtained by telephoning the Michigan Department of Treasury at 1(800)-FORMS-2-ME. The Department of Treasury recommends the use of Federal Treasury Publication 536 in calculating a net operating loss.