103 KAR 16:250 - Net operating loss computation and deduction for corporations

RELATES TO: KRS 141.011, 141.120, 141.121, 141.200, 141.201, 141.202, 141.901

NECESSITY, FUNCTION AND CONFORMITY: KRS 131.130(1) authorizes the Department of Revenue to promulgate administrative regulations necessary to administer and enforce Kentucky's tax laws. KRS 141.150(4) requires the department to promulgate administrative regulations and rules necessary for the proper administration of KRS Chapter 141. This administrative regulation establishes methods of computing a corporation's net operating loss deduction and application of the deduction to subsequent taxable years on taxable net income as authorized by KRS 141.011, 141.200(11)(c), and 141.202(5).

Section 1. Definitions.
(1) "Carryforward" has the same meaning as carryover as used in KRS 141.202.
(2) "Combined group" is defined by KRS 141.202(2)(a).
(3) "Combined group filer" means a group of corporations filing in accordance with KRS 141.202.
(4) "Combined group return" means a return filed under KRS 141.202(3).
(5) "Corporation" is defined by:
(a) KRS 141.202(2)(b) for a combined group return;
(b) KRS 141.010(4) for a separate return for periods beginning on or after January 1, 2018; or
(c) KRS 141.201(2)(d) for an elective consolidated return.
(6) "Doing business in this state" is defined by KRS 141.010(7).
(7) "Elective consolidated filer" means a corporation as defined in Section 7701(a)(3) of the Internal Revenue Code, 26 U.S.C. 7701(a)(3), filing in accordance with KRS 141.201.
(8) "Elective consolidated return" means a return defined under KRS 141.201(2)(b).
(9) "Net operating loss" or "NOL" means net operating loss defined under Section 172 of the Internal Revenue Code as adjusted for differences between KRS Chapter 141 and the Internal Revenue Code.
(10) "Nexus consolidated filer" means a corporation as defined under KRS 141.010(4) or 141.900(24), filing in accordance with KRS 141.200(8), (9), (10) and (11).
(11) "Nexus consolidated return" means a return defined under KRS 141.200(9)(g).
(12) "Separate return" is defined by KRS 141.201(2)(c).
(13) "Separate return filer" means a corporation filing in accordance with KRS 141.201(3)(b).
Section 2. Computation and Application of Net Operating Loss.
(1) Combined group filers, elective consolidated filers, and separate return filers shall compute net operating loss for Kentucky purposes in the following manner:
(a) For elective consolidated filers, the net operating loss shall be multiplied by the group's apportionment factor provided by KRS 141.120 or 141.121;
(b) For combined group filers, the net operating loss of each taxpayer member shall be computed in accordance with KRS 141.202(5)(c);
(c) For separate returns filers, the net operating loss shall be multiplied by the apportionment factor provided by KRS 141.120 or KRS 141.121; and
(d) The apportioned net operating loss shall be available for carryforward.
(2) Elective consolidated filer net operating loss carryforward to a combined group return or separate returns. This subsection shall apply if an elective consolidated filer who has incurred net operating losses as a consolidated group will now be filing combined group returns or separate returns, and establishes how those elective consolidated net operating losses shall be treated for purposes of the combined group returns or separate returns.
(a) An elective consolidated filer having a net operating loss carryforward on the last elective consolidated return may carry that loss forward to combined group returns or separate returns. The following requirements shall apply to this situation:
1. Determine the post-apportioned elective consolidated group net operating loss carryforward. The elective consolidated group's apportionment factor provided by KRS 141.120, KRS 141.121, or KRS 141.901 shall be used to determine the post-apportioned net operating loss.
2. Determine the years that are in the post-apportioned elective consolidated group net operating loss carryforward. All post-apportioned net operating loss carryforwards shall be used on a first-in-first-out basis (i.e., most recent losses remain).
3. Determine each loss corporation's share of the net operating loss for each year in the following manner:
a. Allocate the post-apportioned elective consolidated group net operating loss carryforward by year to each loss corporation in each year. For a year in which the total loss generated exceeds the carryforward allocated to that year, the post-apportioned net operating loss shall be prorated for that year proportionally based on the loss generated by each member;
b. Add together each loss corporation's allocated share of the losses for each year it was a member of an elective consolidated group; and
c. Carry the separate entity net operating loss carryforward computed in clauses a. and b. of this subparagraph to the first combined group return or separate return due after the elective consolidated return.
(b) Prior year net operating loss carryforwards shall not be available to separate entities that were not doing business in this state prior to becoming part of an elective consolidated return.
(3) Nexus consolidated filer net operating loss carryforward to a combined group return, an elective consolidated return, or a separate return. This subsection shall apply if a nexus consolidated filer ceases to exist who had incurred net operating losses as a consolidated group and establishes how those nexus consolidated net operating losses shall be treated.
(a) If a nexus consolidated filer ceases to exist or a member leaves the group and a consolidated net operating loss carryforward exists, that net operating loss carryforward may be carried forward to the combined group return, the elective consolidated return, or the separate returns. The following requirements shall apply to this situation:
1. Determine the pre-apportioned nexus consolidated group net operating loss carryforward.
2. Determine the years that are in the pre-apportioned nexus consolidated group net operating loss carryforward. All pre-apportioned net operating loss carryforwards shall be used on a first-in-first-out basis (i.e., most recent losses remain).
3. Determine each loss corporation's share of the net operating loss for each year in the following manner:
a. Allocate the pre-apportioned nexus consolidated group net operating loss carryforward by year to each loss corporation in each year. For a year in which the total loss generated exceeds the carryforward allocated to that year, the pre-apportioned net operating loss shall be prorated for that year proportionally based on the loss generated by each member in that year;
b. Multiply the pre-apportioned net operating loss carryforward amounts as allocated to the members by the nexus consolidated group's apportionment factor for each year a net operating loss exists to determine the post-apportioned net operating loss carryforward that member may carry forward to the future. The apportionment factor calculation is provided by KRS 141.120, 141.121, or 141.901;
c. Add together the post-apportioned losses generated for each loss corporation during the time in which it was included in a nexus consolidated return; and
d. Carry the separate entity net operating loss carryforward computed in clauses a. to c. of this subparagraph to the first combined group return, elective consolidated return, or separate return due after the nexus consolidated group ceases to exist or after the member leaves the nexus consolidated group.
(b) Prior year net operating loss carryforwards shall not be available to separate entities that were not doing business in this state prior to becoming part of a nexus consolidated return. To generate a net operating loss in this state, a taxpayer shall be doing business in this state in the year in which the loss is generated.
Section 3. Net Operating Loss Limitation.
(1) Corporations that generated net operating losses may carryforward those losses to deduct against taxable net income. The deduction for losses generated for tax years beginning on or after January 1, 2018, shall be limited to eighty (80) percent of the taxable net income as allowed by Section 172 of the Internal Revenue Code.
(2) Nexus consolidated returns shall be subject to the fifty (50) percent limitation as required in KRS 141.200(11)(c).
(3) Taxpayer members of a combined group return that utilize the net operating loss of another taxpayer member that was not a member of the same combined group return in the year in which the net operating loss was originally incurred shall be subject to the fifty (50) percent limitation as required in KRS 141.202(5)(c) 3. or 4.
Section 4. Net operating losses by corporations included in a combined group return shall be determined in accordance with KRS 141.202(5)(c).
Section 5. This administrative regulation shall apply to the computation of the net operating loss deduction of corporations for taxable years beginning on or after January 1, 2018, except where otherwise noted in this administrative regulation.
Section 6. Examples for the computation and application of net operating losses. The following examples relate to the net operating loss computations found in Sections 2 through 4 of this administrative regulation:
(1) Example 1 - Member Leaves Nexus Consolidated Group Parent Corporation and its three (3) subsidiaries, Sub A, Sub B, and Sub C, have nexus in Kentucky. Parent Corporation files nexus consolidated group returns for Year 1 through Year 4, but Sub A will not be included in the group in Year 4. The nexus consolidated group has a pre-apportioned nexus group NOL carryforward of $85,000 ($5,000 from year 1, $40,000 from year 2, and $40,000 from year 3) at the end of Year 3 (see Figure 1-1). Apportionment factors for each member are given below (see Figure 1-2).

Figure 1-1

Year 1

Year 2

Year 3

Sub A In-come/(Loss)

($25,000)

($25,000)

($15,000)

Sub B In-come/(Loss)

(10,000)

(10,000)

(10,000)

Sub C In-come/(Loss)

(5,000)

30,000

50,000

Parent Corporation Income/(Loss)

(5,000)

(5,000)

(15,000)

Group In-come/(Loss)

($45,000)

($10,000)

$10,000

Nexus Group NOL Adjustment

45,000

25,000

15,000

Group Taxable Income

0

15,000

25,000

Accumulating Group NOL Carryforward

$45,000

$70,000

$85,000

Figure 1-2

Year 1 Apportion-ment Factor

Year 2 Apportion-ment Factor

Year 3 Apportion-ment Factor

Nexus Group

23%

28%

32%

The following steps determine the post-apportioned net operating loss allocated to Sub A when it departs the group as well as the pre-apportioned NOL that will be carried forward by the group to Year 4.

(a) Determine the pre-apportioned group NOL carryforward: $85,000 (see Figure 1-1).
(b) Determine which years are in the pre-apportioned group NOL carryforward assuming all pre-apportioned NOL carryforward amounts are used on a first-in-first-out basis (i.e., most recent losses remain).
1. Year 3 Losses Remaining: $40,000
2. Year 2 Losses Remaining: $40,000
3. Year 1 Losses Remaining: $5,000
(c) Allocate the pre-apportioned group NOL carryforward by year to each loss corporation in each year. For a year in which the total loss generated exceeds the carryforward allocated to that year, prorate the pre-apportioned NOL carryforward for that year proportionally based on the loss generated by each member (see Figure 1-3).

Figure 1-3

Year 1

Year 2

Year 3

Sub A Loss

$25,000

$25,000

$15,000

Total Losses of all Loss Corporations

$45,000

$40,000

$40,000

Allocation Percentage

55.56%

62.5%

37.5%

Remaining Loss In Group Carryforward

$5,000

$40,000

$40,000

Allocated Remaining Sub A Loss

$2,777

$25,000

$15,000

Sub B Loss

$10,000

$10,000

$10,000

Total Losses of all Loss Corporations

$45,000

$40,000

$40,000

Allocation Percentage

22.22%

25.0%

25.0%

Remaining Loss In Group Carryforward

$5,000

$40,000

$40,000

Allocated Remaining Sub B Loss

$1,111

$10,000

$10,000

Sub C Loss

$5,000

-

-

Total Losses of all Loss Corporations

$45,000

$40,000

$40,000

Allocation Percentage

11.11%

-

-

Remaining Loss In Group Carryforward

$5,000

$40,000

$40,000

Allocated Remaining Sub C Loss

$556

-

-

Parent Corporation Loss

$5,000

$5,000

$15,000

Total Losses of all Loss Corporations

$45,000

$40,000

$40,000

Allocation Percentage

11.11%

12.5%

37.5%

Remaining Loss In Group Carryforward

$5,000

$40,000

$40,000

Allocated Remaining Parent Loss

$556

$5,000

$15,000

(d) Multiply the pre-apportioned NOL carryforward amounts allocated to the member that is leaving the group by the nexus consolidated group's apportionment factors in each year an NOL carryforward exists to determine the post-apportioned NOL that member may carryforward to the future (see Figure 1-4).

Figure 1-4

Year 1

Year 2

Year 3

Sub A NOL Carryforward

$2,777

$25,000

$15,000

Nexus Group Apportionment Factor

23%

28%

32%

Post-Apportioned NOL Carryforward Per Year

$638

$7,000

$4,800

Accumulating Total Sub A Carryforward

$638

$7,638

$12,438

(e) Add the pre-apportioned NOL carryforward amounts allocated to the remaining members in the group to calculate the nexus consolidated group's carryforward amount (see Figure 1-5).

Figure 1-5

Year 1

Year 2

Year 3

Remaining Sub B Loss

$1,111

$10,000

$10,000

Remaining Sub C Loss

$556

-

-

Remaining Parent Loss

$556

$5,000

$15,000

Group Carryforward Per Year

$2,223

$15,000

$25,000

Accumulating Group Carryforward

$2,223

$17,223

$42,223

(2) Example 2 - Remaining Nexus Consolidated Group Dissolves.
(a) This example is a continuation of Example 1. Parent Corporation and its two (2) remaining subsidiaries, Sub B and Sub C, have nexus in Kentucky. Parent Corporation files nexus consolidated group returns for Year 1 through Year 4, but each group member will file separately in Year 5. The group has a preapportionedNOL carryforward of $42,223 at the end of Year 3 (see Figure 1-3). Group apportionment factors for each year are given below (see Figure 2-2).

Figure 2-1

Year 1

Year 2

Year 3

Year 4

Sub B In-come/(Loss)

($10,0 00)

($10,0 00)

($10,0 00)

($10,0 00)

Sub C In-come/(Loss)

(5,000)

30,000

50,000

60,000

Parent Corporation In-come/(Loss)

(5,000)

(5,000)

(15,00 0)

(30,00 0)

Group Income (loss)

N/A

N/A

N/A

$20,00 0

Nexus Group NOL Adjustment

N/A

N/A

N/A

10,000

Group

Taxable

Income

N/A

N/A

N/A

30,000

Group NOL Generated

$2,223 *

$15,00 0*

$25,00 0*

$10,00 0

Accumulating Group Carryforward

$2,223

$17,22 3

$42,22 3

$52, 223

* See "Group Carryforward Per Year" amounts from Figure 1-5

Figure 2-2

Year 1 Apportion-ment Factor

Year 2 Apportion-ment Factor

Year 3 Apportion-ment Factor

Year 4 Apportion-ment Factor

Nex us Gro up

23%

28%

32%

17%

(b) The following steps determine the post-apportioned NOL that will be carried forward separately by each group member to Year 5 when the nexus consolidated group dissolves.
1. Determine the pre-apportioned group NOL carryforward: $52,223 (see Figure 2-1).
2. Determine whichyears are in the pre-apportioned group NOL carryforward assuming all NOL carryforward amounts are used on a first-in-first-out basis (i.e., most recent losses remain).
a. Year 4 Losses Remaining: $40,000
b. Year 3 Losses Remaining: $12,223
3. Allocate the pre-apportioned group NOL carryforward by year to each loss corporation in each year. For a year in which the total loss generated exceeds the carryforward allocated to that year, prorate the pre-apportioned NOL carryforward for that year proportionally based on the loss generated by each member (see Figure 2-3).

Figure 2-3

Year 3

Year 4

Sub B Loss

$10,000

$10,000

Total Losses of all Loss Corporations

$25,000

$40,000

Allocation Percentage

40%

25%

Remaining Loss in Group Carryforward

$12,223

$40,000

Allocated Remaining Sub B Loss

$4,890

$10,000

Parent Corporation Loss

$15,000

$30,000

Total Losses of all Loss Corporations

$25,000

$40,000

Allocation Percentage

60%

75%

Remaining Loss in Group Carryforward

$12,223

$40,000

Allocated Remaining Parent Loss

$7,333

$30,000

Group NOL Per Year

$12,223

$40,000

Accumulating Group NOL

$12,223

$52,223

4. Multiply the pre-apportioned NOL carryforward amounts allocated to each member that is leaving the group by the nexus consolidated group's apportionment factor in each year an NOL exists to determine the post-apportioned NOL that member may carry forward to the future (see Figure 2-4). Figure 2-4

Figure 2-4

Year 3

Year 4

Sub B NOL Carryforward

$4,890

$10,000

Nexus Group Apportionment Factor

32%

17%

Sub B Post-Apportioned NOL Carryforward

$1,564

$1,700

Accumulating Sub B Post-Apportioned NOL Carryforward

$1,564

$3,264

Parent Corporation NOL Carryforward

$7,333

$30,000

Nexus Group Apportionment Factor

32%

17%

Parent Corp Post-Apportioned NOL Carryforward

$2,346

$5,100

Accumulating Parent Post-Apportioned NOL Carryforward

$2,346

$7,446

(3) Example 3 - Member Leaves Elective Consolidated Group.
(a) Parent Corporation and its three (3) subsidiaries, Sub A, Sub B, and Sub C, file elective consolidated group returns for Year 1 through Year 4, but Sub A will not be included in the group in Year 4. The group has a post-apportioned NOL carryforward of $23,500 at the end of Year 3 (see Figure 3-1).

Figure 3-1

Year 1

Year 2

Year 3

Sub A In-come/(Loss)

($25,000)

($25,000)

($15,000)

Sub B In-come/(Loss)

(10,000)

(10,000)

(10,000)

Sub C In-come/(Loss)

(5,000)

30,000

50,000

Parent Corporation In-come/(Loss)

(5,000)

(5,000)

(15,000)

Group In-come/(Loss)

($45,000)

($10,000)

$10,000

Group Apportionment Factor

50%

40%

30%

Taxable Net In-come/(Loss)

($22,500)

($4,000)

$3,000

NOL Generat-ed/(Used)

22,500

4,000

(3,000)

Accumulating Group NOL Carryforward

$22,500

$26,500

$23,500

(b) The following steps determine the post-apportioned NOL allocated to Sub A when it departs the group as well as the post-apportioned NOL that will be carried forward by the group to Year 4.
1. Determine the post-apportioned group NOL carryforward: $23,500 (see Figure 3-1).
2. Determine which years are in the post-apportioned group NOL carryforward assuming all post-apportioned NOL carryforward amounts are used on a first-in-first-out basis (i.e., most recent losses remain).
a. Year 3 No NOL Generated
b. Year 2 Losses Remaining: $4,000
c. Year 1 Losses Remaining: $19,500
3. Prorate the post-apportioned group NOL carryforward by year to each loss corporation in each year proportionally based on the loss generated by each member (see Figure 3-2).

Figure 3-2

Year 1

Year 2

Sub A Loss

$25,000

$25,000

Total Losses of all Loss Corporations

$45,000

$40,000

Allocation Percentage

55.56%

62.5%

Remaining Loss in Group Carryforward

$19,500

$4,000

Allocated Remaining Sub A Loss Per Year

$10,833

$2,500

Accumulating Sub A Loss

$10,833

$13,333

REMAINING GROUP

Sub B Loss

$10,000

$10,000

Total Losses of all Loss Corporations

$45,000

$40,000

Allocation Percentage

22.22%

25%

Remaining Loss in Group Carryforward

$19,500

$4,000

Allocated Remaining Sub B Loss Per Year

$4,333

$1,000

Sub C Loss

$5,000

-

Total Losses of all Loss Corporations

$45,000

$40,000

Allocation Percentage

11.11%

-

Remaining Loss in Group Carryforward

$19,500

$4,000

Allocated Remaining Sub C Loss Per Year

$2,167

-

Parent Corporation Loss

$5,000

$5,000

Total Losses of all Loss Corporations

$45,000

$40,000

Allocation Percentage

11.11%

12.5%

Remaining Loss in Group Carryforward

$19,500

$4,000

Allocated Remaining Parent Corporation Loss Per Year

$2,167

$500

Remaining Group NOL Per Year

$8,667

$1,500

Accumulating Remaining Group NOL Carryforward

$8,667

$10,167

(4) Example 4 - Remaining Elective Consolidated Group Dissolves.
(a) This example is a continuation of Example 3. Parent Corporation and its two (2) remaining subsidiaries, Sub B, and Sub C, file elective consolidated group returns for Year 1 through Year 4, but each group member will either file separately or as part of a combined group in Year 5. The elective consolidated group has a post-apportioned NOL carryforward of $13,167 at the end of Year 4.(see Figure 4-1).

Figure 4-1

Year 1

Year 2

Year 3

Year 4

Sub B In-come/(Los s)

(10,0 00)

(10,0 00)

(10,00 0)

(15,0 00)

Sub C In-come/(Los s)

(5,00 0)

30,00 0

50,00 0

25,0 00

Parent Corporation In-come/(Los s)

(5,00 0)

(5,00 0)

(15,00 0)

(20,0 00)

Group In-come/(Los s)

N/A

N/A

N/A

($10, 000)

Group Apportion-ment Factor

N/A

N/A

N/A

30%

NOL Remaining per year*

$8,66 7**

$1,50 0*

$ -

3,00 0

Accumulating Group NOL Carryforward

$8,66 7**

$10,1 67

$10,1 67

$13, 167

* See Figure 3-2 from Example 3.

** Year 1 NOL of $8,667 is already reduced by the $3,000 NOL utilized in year 3 (See Figure 3-1)

(b) The following steps determine the post-apportioned NOL that will be carried forward separately by each group member to Year 5 when the elective consolidated group dissolves.
1. Determine the post-apportioned group NOL carryforward: $13,167 (see Figure 4-1).
2. Determine which years are in the post-apportioned group NOL carryforward assuming all post-apportioned NOL carryforward amounts are used on a first-in-first-out basis (i.e., most recent losses remain).
a. Year 4 Losses Remaining: $3,000
b. Year 3 No NOL Generated
c. Year 2 Losses Remaining: $1,500
d. Year 1 Losses Remaining: $8,667
3. Prorate the post-apportioned group NOL carryforward by year to each loss corporation in each year proportionally based on the loss generated by each member (see Figure 4-2).

Figure 4-2

Year 1*

Year 2*

Year 4

Sub B Loss

$15,000

Total Losses of all Loss Corporations

$35,000

Allocation Percentage

42.85%

Remaining Loss in Group Carryforward

$3,000

Allocated Remaining Sub B Loss Per Year

$4,333

$1,000

$1,286

Accumulating Sub B NOL Carryforward

$4,333

$5,333

$6,619

Allocated Remaining Sub C Loss Per Year

$2,167

-

-

Accumulating Sub C NOL Carryforward

$2,167

$2,167

$2,167

Parent Corporation Loss

$20,000

Total Losses of all Loss Corporations

$35,000

Allocation Percentage

57.15%

Remaining Loss in Group Carryforward

$3,000

Allocated Remaining Parent Loss Per Year

$2,167

$500

$1,714

Accumulating Parent NOL Carryforward

$2,167

$2,667

$4,381

Accumulating Group NOL Carryforward

$8,667

$10,167

$13,167

* See Figure 3-2 from Example 3

NOTE: Year 3 is omitted from Figure 4-2. The $3,000 NOL utilized in Year 3 was accounted for in the Year 1 remaining losses.

(5) Example 5- Sharing of Kentucky Net Operating Losses within a Combined Group.
(a) Parent Corporation and its three (3) subsidiaries, Sub A, Sub B, and Sub C, file a combined return in 2019, the first year in which a combined return is required. All entities have nexus in Kentucky and are taxpayer members of the combined group. The combined group has apportionable group net income of $50,000 in 2019. The 2019 apportionment factors for the members of the group are shown in Figure 5-1 below. The members also report the following apportioned NOL carryforwards from 2017 and 2018 (Figure 5-1).

Figure 5-1

Parent

Sub A

Sub B

Sub C

2019 Group Income

$50,000

$50,000

$50,000

$50,000

2019 Apportionment Factor

20%

10%

10%

5%

2019 Taxable Income

$10,000

$5,000

$5,000

$2,500

2017 NOL Carryforward*

$2,000

$12,000

$3,500

$0

2018 NOL Carryforward*

$5,000

$0

$1,700

$0

* 2017 (and earlier years) NOL can be applied against 100 percent of taxable income. 2018 (and later years) NOL is limited to eighty (80) percent of net income.

(b) The following calculation determines the maximum allowable NOL deduction available to each entity (See Figure 5-2). This amount may exceed (or be less than) the actual amount of prior year NOL available within the group. The maximum allowable NOL deduction available to each entity is the sum of:
1. NOLs generated by the entity in 2017 and previous years; plus
2. NOLs generated by the entity in 2018, up to a maximum of eighty (80) percent of the entity's 2019 taxable income; plus
3. NOLs generated by other taxpayer members of the group in years before a combined return was required, up to a maximum of fifty (50) percent of the 2019 taxable income of the entity that is utilizing the NOL. (Note that losses from years in which a combined report was required may be shared between taxpayer members of the combined group without reference to the fifty (50) percent limitation, if the entities sharing the losses were members of the combined group in the year the loss was generated).

Figure 5-2

NOL Limitations

Parent

Sub A

Sub B

Sub C

2017 and Prior

NOLs (Up to 100% of 2019 taxable income)

$ 10,000

$5,000

$5,000

$2,500

Max

$

$

$4,000

$2,000

Amount of Allowable 2018 NOL (Up to 80% of 2019 Taxable Income)

8,000

4,000

Max of Allowable Shared Amount (Up to 50% of 2019 Taxable Income)

$ 5,000

$ 2,500

$2,500

$1,250

(c) The following steps determine the utilization of the available NOL by each entity and each entity's resulting taxable income and NOL carryforward to 2020 (See Figure 5-3).
1. Subtract the entity's available 2017 (and earlier) NOL amount from the entity's 2019 taxable income on a first-in-first-out basis (i.e. most recent losses remain), up to 100 percent of 2019 taxable income;
2. Subtract the entity's 2018 NOL up to the maximum allowable 2018 NOL (eighty (80) percent of 2019 taxable income) from the amount remaining after Step 1; and
3. Subtract the NOL amounts available to be shared from other taxpayer members of the combined group up to the maximum allowable shared amount (fifty (50) percent of 2019 taxable income) from the amount remaining after Step 2.
(d) The utilization of NOLs to reduce taxable income shall not be reduced below zero under any circumstances. If group NOLs exceed available income, the remaining NOL may be carried forward.

Figure 5-3

Parent

Sub A

Sub B

Sub C

2019 Taxable Income

$10,000

$ 5,000

$5,000

$2,500

Less: Entity's 2017 NOL

($ 2,000)

($5,000)

($3,500)

$0

Taxable Income Remaining

$ 8,000

$0

$1,500

$2,500

Less: Entity's 2018 NOL

($ 5,000)

N/A

($1,500)

$0

Taxable Income Remaining

$ 3,000

$0

$ 0

$2,500

Less: Shared NOL

($ 3,000)

N/A

N/A

($1,250)

Net Taxable Income After NOLD

$0

$0

$0

$ 1,250

NOL Carryforward to 2020

$0

$ 2,750*

$200**

$0

*After sharing of NOLs, Sub A carries forward $2,750 of its 2017 NOL into 2020.

**Sub B carries forward $200 of its 2018 NOL into 2020 ($1,700 - $1,500).

(6) Example 6- Sharing of Kentucky Net Operating Losses within a Combined Group that includes a Non-Taxpayer Member.
(a) Parent Corporation and its three (3) subsidiaries, Sub A, Sub B, and Sub C, file a combined return in 2020. Sub A does not have nexus in Kentucky and is included in the group under the unitary principle. The combined group has apportionable group net income of $50,000 in 2020. The 2020 apportionment factors for the members of the group are shown below. The members also report the following post-apportioned NOL carryforwards from 2018, a year in which each entity filed separately, and 2019, a year in which the group filed a combined return (Figure 6-1).

Figure 6-1

Parent

Sub A

Sub B

Sub C

2020 Group Income

$50,000

$50,000

$50,000

$50,000

2020 Apportionment Factor

20%

0%

10%

5%

2020 Taxable Income

$10,000

$0

$5,000

$2,500

2018 NOL Carryforward

$0

$12,000

$0

$0

2019 NOL Carryforward

$7,500

$5,000

$1,000

(b) The maximum allowable NOL deduction available to each entity is equal to eighty (80) percent of its taxable income (See Figure 6-2).

Figure 6-2

NOL Limitations

Parent

Sub B

Sub C

80% of 2020 Taxable Income

$8,000

$4,000

$2,000

(c) Figure 6-3 shows the utilization of the available NOL deduction by each entity and each entity's resulting taxable income and NOL carryforward to 2021. As the 2019 NOLs were generated in a year in which a combined report was required, they can be shared among taxpayer members of the group, subject to the eighty (80) percent limitation. Since Sub A does not have Kentucky nexus in 2020, it is not a taxpayer member and therefore its 2018 NOLs cannot be utilized by other group members. Sub A cannot utilize its 2018 losses until it has Kentucky source income.

Figure 6-3

Parent

Sub A

Sub B

Sub C

2019 Taxable Income

$10,000

$0

$5,000

$2,500

Less: Entity's Own 2019 NOL

($ 7,500)

n/a

($4,000)

($1,000)

Taxable

Income

Remaining

$ 2,500

$0

$1,000

$1,500

Less: Shared NOL

($ 500)

N/A

$ 0

($ 500)

Taxable

Income

Remaining

$ 2,000

$0

$1,000

$1,000

2018 NOL Remaining

$0

$12,000

$0

$0

2019 NOL Remaining

$0

$0

$0**

$0

(d) Figure 6-4 shows how Sub B's NOLs were shared among the group.

Figure 6-4

Sub B 2019 NOL

$5,000

Offset Max of 80% of Sub B 2020 Income

($4,000)

NOL Remaining

$1,000

Utilized by Parent (up to 80% limit)

($ 500)

NOL Remaining

$ 500

Utilized by Sub C

($ 500)

NOL Remaining

$ 0

Notes

103 KAR 16:250
32 Ky.R. 1827; 33 Ky.R. 70; eff. 8-7-2006; 45 Ky.R. 2153, 2571; eff. 4-5-2019; 46 Ky.R. 60, 868; eff. 10-4-2019.

STATUTORY AUTHORITY: KRS 131.130, 141.018, 141.050

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