26 CFR 1.172-5 – Taxable income which is subtracted from net operating loss to determine carryback or carryover
(a) Taxable year subject to the Internal Revenue Code of 1954. The taxable income for any taxable year subject to the Internal Revenue Code of 1954 which is subtracted from the net operating loss for any other taxable year to determine the portion of such net operating loss which is a carryback or a carryover to a particular taxable year is computed with the modifications prescribed in this paragraph. These modifications shall be made independently of, and without reference to, the modifications required by §§ 1.172-2(a) and 1.172-3(a) for purposes of computing the net operating loss itself.
(1) Modifications applicable to unincorporated taxpayers only. In the case of a taxpayer other than a corporation, in computing taxable income and adjusted gross income:
(i) No deduction shall be allowed under section 151 for the personal exemptions (or under any other section which grants a deduction in lieu of the deductions allowed by section 151) and under section 1202 in respect of the net long-term capital gain.
(ii) The amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includible on account of gains from sales or exchanges of capital assets.
(2) Modifications applicable to all taxpayers. In the case either of a corporation or of a taxpayer other than a corporation:
(i) Net operating loss deduction. The net operating loss deduction for such taxable year shall be computed by taking into account only such net operating losses otherwise allowable as carrybacks or carryovers to such taxable year as were sustained in taxable years preceding the taxable year in which the taxpayer sustained the net operating loss from which the taxable income is to be deducted. Thus, for such purposes, the net operating loss for the loss year or any taxable year thereafter shall not be taken into account.
(ii) Recomputation of percentage limitations. Unless otherwise specifically provided in this subchapter, any deduction which is limited in amount to a percentage of the taxpayer’s taxable income or adjusted gross income shall be recomputed upon the basis of the taxable income or adjusted gross income, as the case may be, determined with the modifications prescribed in this paragraph. Thus, in the case of an individual the deduction for medical expenses would be recomputed after making all the modifications prescribed in this paragraph, whereas the deduction for charitable contributions would be determined without regard to any net operating loss carryback but with regard to any other modifications so prescribed. See, however, the regulations under paragraph (g) of § 1.170-2 (relating to charitable contributions carryover of individuals) and paragraph (c) of § 1.170-3 (relating to charitable contributions carryover of corporations) for special rules regarding charitable contributions in excess of the percentage limitations which may be treated as paid in succeeding taxable years.
Salary $5,000 Net long-term capital gain 4,000 Total gross income 9,000 Less: Deduction allowed by section 1202 in respect of net long-term capital gain 2,000 Adjusted gross income 7,000 Less: Deduction for personal exemption $600 Deduction for medical expense ($410 actually paid but allowable only to extent in excess of 3 percent of adjusted gross income) 200 Deduction for charitable contributions ($2,000 actually paid but allowable only to extent not in excess of 20 percent of adjusted gross income) $1,400 $2,200 Taxable income 4,800 Salary $5,000 Net long-term capital gain 4,000 Total gross income 9,000 Less: Deduction for carryback of 1955 net operating loss 3,000 Adjusted gross income 6,000 Less: Deduction for medical expense ($410 actually paid but allowable only to extent in excess of 3 percent of adjusted gross income as modified under this paragraph) $230 Deduction for charitable contributions ($2,000 actually paid but allowable only to extent not in excess of 20 percent of adjusted gross income determined with all the modifications prescribed in this paragraph other than the net operating loss carryback) 1,800 2,030 Taxable income 3,970 Salary $5,000 Net long-term capital gain 4,000 Total gross income 9,000 Less: Deduction allowed by section 1202 in respect of net long-term capital gain 2,000 Adjusted gross income 7,000 Less: Deduction for personal exemption $600 Standard deduction allowed by section 141 $700 $1,300 Taxable income 5,700 Salary $5,000 Net long-term capital gain 4,000 Total gross income 9,000 Less: Deduction for carryback of 1960 net operating loss 4,700 Adjusted gross income 4,300 Less: Standard deduction 430 Taxable income 3,870
(iii) Minimum limitation. The taxable income, as modified under this paragraph, shall in no case be considered less than zero.
(3) Electing small business corporations. For special rule applicable to corporations which were electing small business corporations under Subchapter S (section 1361 and following), Chapter 1 of the Code, during one or more of the taxable years described in section 172(b)(1), see paragraph (f) of § 1.172-1.
(4) Qualified real estate investment trust. Where a net operating loss is carried over to a qualified taxable year (as defined in § 1.172-10(b)) ending after October 4, 1976, the real estate investment trust taxable income (as defined in section 857(b)(2)) shall be used as the “taxable income” for that taxable year to determine, under section 172(b)(2), the balance of the net operating loss available as a carryover to a subsequent taxable year. The real estate investment trust taxable income, however, is computed by applying the rules applicable to corporations in paragraph (a)(2) of this section. Thus, in computing real estate investment trust taxable income for purposes of section 172(b)(2), the net operating loss deduction for the taxable year shall be computed in accordance with paragraph (a)(2)(i) of this section. The principles of this subparagraph may be illustrated by the following examples:
(ii) X designated $50,000 of the $120,000 of dividends paid as capital gains dividends (as defined in section 857(b)(3)(C) and § 1.857-6(e)). Thus, $70,000 is an ordinary dividend. Since both ordinary dividends and capital gains dividends are taken into account in computing the deduction for dividends paid under section 857(b)(2)(B), the result will be the same as in Example 1; that is, the portion of the 1977 net operating loss available as a carryover to 1979 and subsequent years is $70,000.
(b) [Reserved]