Treatment of net operating losses in Missouri

Question: If an eligible small business elects, under the provisions of the 2009 American Reinvestment and Recovery Act (ARRA), to carry back a net operating loss more than two years on their federal return, will the net operating loss deduction be disallowed on the Missouri carryback returns of greater than two years?

Answer: Yes. This is due to legislation enacted in 2002 as a response to the previous federal expansion of the federal carryback period. Any deduction attributable to a net operating loss carryback of more than two years must be added to federal adjusted gross income for individuals or federal taxable income for corporations, unless that deduction is attributable to a farm loss. If a deduction is disallowed (i.e., required to be added to federal adjusted gross income or federal taxable income) because of a carryback of more than two years, an amount equal to the disallowed amount is available as a  net operating loss subtraction modification , and can be claimed at the taxpayer's discretion, over the twenty-year period following the year of the loss.

Question: Will the election available to eligible small businesses apply to federal and Missouri individual income tax returns?

Answer: Yes. Although the ARRA applies to  eligible small businesses , this is defined by reference to a federal gross receipts test. This test applies to sole proprietorships, S corporations, and partnerships, which will affect, either directly or through pass-through provisions, the individual's federal (and thus, Missouri) returns.

Question:  If an eligible business elects, under the provisions of the Worker, Homeownership, and Business Assistance Act of 2009 to carry back a net operating loss more than two years on their federal return, will the net operating loss deduction be disallowed on the Missouri carryback returns of greater than two years. 

Answer:   Yes. This is due to legislation enacted in 2002 as a response to the previous federal expansion of the federal carryback period. Any deduction attributable to a net operating loss carryback of more than two years must be added to federal adjusted gross income for individuals or federal taxable income for corporations, unless that deduction is attributable to a farm loss. If a deduction is disallowed (i.e., required to be added to federal adjusted gross income or federal taxable income) because of a carryback of more than two years, an amount equal to the disallowed amount is available as a "net operating loss subtraction modification", and can be claimed at the taxpayer's discretion, over the twenty-year period following the year of the loss.

Background

Prior to the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147), the default federal carryback and carryover period was to allow a two-year carryback and a twenty-year carryforward.

In March of 2002, the federal government enacted the Job Creation and Worker Assistance Act of 2002, which changed, for the 2001 and 2002 years only, the default carryback period to five years.

In June of 2002, Missouri passed S.B. 1248, which included a new Paragraph 143.121.2(d) (now 2(4)) to include as an addition modification to federal adjusted gross income:

(d) The amount of any deduction that is included in the computation of federal taxable income for net operating loss allowed by Section 172 of the Internal Revenue Code of 1986, as amended, except for any deduction for net operating loss the taxpayer claims in the tax year in which the net operating loss occurred or carries forward for a period not to exceed twenty years and carries backward for not more than two years.

This required any net operating loss deduction to be added to federal adjusted gross income or federal taxable income, with the exception for net operating loss deductions claimed in two years or less prior to the loss year, or twenty years or less after the loss year.

Some changes were made later to this section to allow farm losses to be included in the exception, and to allow a subtraction modification in future years for losses disallowed under this section. However, the addition modification still remains in our statutes, even though the federal legislation prompting it expired after 2002.