2.26 Ark. Code R. § 805(f) - Separate Computation of Taxable Income or Loss

A consolidated net operating loss ("NOL") carryover shall be allowed as a deduction from gross income on the consolidated return of an affiliated group under the following rules:

(A) Consolidated NOL carryover shall consist of any consolidated net operating losses (as determined under paragraph C) of the group plus any net operating losses incurred by members of the group in separate return years (as defined in paragraph D) which may be carried over under the provisions of ACA 2651-427. However, a NOL incurred by a member corporation in a separate return limitation year (as defined in paragraph E) shall be subject to the limitation set forth in paragraph B;

(B) With respect to the limitation on NOL carryovers from separate return limitation years, in the case of a NOL of a member of the group carried forward from a separate return limitation year, the amount of the NOL allowed to be carried to the consolidated return shall not exceed:

1) the income of the member corporation which incurred the loss computed for the consolidated year, minus

2) the net operating losses attributable to such member which may be carried to the consolidated year arising in tax years prior to the separate return limitation year;

(C) The consolidated NOL shall include the separate net income or loss of each member corporation separately apportioned or allocated to Arkansas and shall be subject to the NOL adjustments set forth in ACA 26-51-427. NOL deductions shall not be taken into account in computing separate net income or loss;

(D) "Separate return year" as used in this regulation means a tax year of a corporation for which it files a separate return or for which it joins in the filing of a consolidated return by another group;

(E) "Separate return limitation year" as used in this regulation means any separate return year of a corporation which was not a member of a group for each day of the tax year. However, a 'separate return limitation year" does not apply in the case of a common parent for a consolidated year or to the separate return year of a predecessor of any member if such predecessor was a member of the group for each day of the tax year;

(F) If a consolidated NOL can carry forward to a separate return year of a corporation which was a member of an affiliated group in the year in which the loss arose, then the portion of the NOL attributable to such corporation shall be apportioned to such corporation under the provisions of paragraph G and shall be a NOL carryover to such separate return year. However, such portions shall not be included in the consolidated NOL carryovers to the equivalent consolidated return year;

(G) The portion of a consolidated NOL attributable to a member of a group is the consolidated NOL multiplied by a fraction, the numerator of which is the separate NOL of such corporation, and the denominator of which is the sum of the separate net operating losses of all members of the group in the year in which such losses were incurred;

(H) If a corporation ceases to be a member during a consolidated return year, any consolidated NOL carryover from a prior tax year must first be carried to such consolidated return year even though all or a portion of the consolidated NOL giving rise to the carryover is attributable to the corporation which ceases to be a member. To the extent not absorbed in such consolidated return year, the portion of the consolidated NOL attributable to the corporation ceasing to be a member shall then be carried to the corporation's first separate return year; and

(I) Complete schedules must be submitted for all net operating losses carried forward to or from consolidated returns. Schedules must contain information to substantiate which corporations incurred net operating losses and the age of the net operating losses. Schedules must also account for all nontaxable income for which adjustments are required to be made to a NOL carryover pursuant to paragraphs A and C and ACA 26-51-427.

The separate taxable income or loss of each member must first be determined as required by ACA 26-51-805(f) and paragraph C. The separate loss of each member is divided by the total losses of all members during the tax year and is then multiplied by the consolidated net loss. The resulting NOL shall then be subject to nontaxable income and adjustments as set forth in ACA 26-51-427. "Add-backs" should be applied to each member of the group separately. If a member with positive income has nontaxable income, no add-back is necessary since that member will have no NOL carry forward.

A separate return limitation year as defined in paragraph E is a year in which the corporation was not eligible to file a consolidated return with the rest of the group. Net operating losses from a separate return limitation year may not offset income of the entire group but may only be used to offset income of the member which has the separate return limitation year in accordance with paragraph B.

A separate return year is different from a separate return limitation year. A separate return year as defined in paragraph D is a year in which a corporation was eligible to file a consolidated return with the rest of the group but did not do so. Net operating losses from separate return years may offset income of the entire group in accordance with paragraph A.

The NOL of the corporation ceasing to be a member is first applied to the final consolidated return in which it participates. Any remaining NOL is then carried to that corporation's separate returns in subsequent years or is subject to separate return limitation year restrictions if it joins another consolidated group.

EXAMPLE 1:

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EXAMPLE 2: Common Parent

Corporation A was a single entity through 1994 and formed a consolidated group when Corporation B was incorporated in 1995. Corporation B was never a part of another group nor did it ever file by itself. Corporation A's 1993 and 1994 NOL is used to offset the 1996 consolidated income from both A and B. The remaining balance of Corporation A's 1994 NOL carry forward is $36,400 ($40,000 less $3,600) and may be used by the consolidated group subject to the five (5) year NOL carry forward provision stated in ACA 26-51-427. This example assumes there are no non-taxable income adjustments for the loss years of 1993, 1994 and 1995.

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EXAMPLE 3: Separate Return Year

Corporation A and B are members of a federal consolidated group which filed separate Arkansas returns for 12/94 and 12/95 and a consolidated Arkansas return in 12/96. The 12/94 and 12/95 years are separate return years.

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EXAMPLE 4: Separate Return Limitation Year

Corporation A & B filed as separate entities through 1994. On 01/01/95, Corporation A bought 100% of Corporation B. The NOL of Corporation B is limited by the separate return limitation year restrictions and can only offset its own income. This example assumes there are no nontaxable income adjustments for the loss years.

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* (Subject to SEPARATE RETURN LIMITATION YEAR RULE - Can only offset "B" corporation income.)

EXAMPLE 5: Nontaxable Add-Back

Corporation A has $5,000 of nontaxable interest income.

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Corporation A has $6,000 of nontaxable interest income, but the add-back is limited to the loss of the entity earning nontaxable income.

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EXAMPLE 6: Member Leaving Group

Corporations A, B, and C filed as a consolidated group through 12/95. On 01/01/96, Corporation C was sold to Corporation D and the NOL of Corporation C is taken to the new group (but limited to SRLY). Corporation D has no NOL carryover.

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Notes

2.26 Ark. Code R. § 805(f)