AICPA Representative Tasks (verbatim). 1. Remembering & Understanding, Recall the limitations on the use of net operating losses when there is an ownership change. 2. Application, Calculate the amount of a C corporation's net operating loss for a given year and any related carryforward. 3. Application, Calculate the amount of a C corporation's capital loss utilized in the current year and the related carryback or carryforward.
A net operating loss arises when a C corporation's allowable deductions exceed its gross income for the tax year. The NOL computation requires specific modifications to prevent double-counting and preserve the loss character for carryover purposes.
When computing the NOL, the corporation must add back:
- Dividends-received deduction (DRD)
- NOL deduction from prior-year carryforwards
- Capital loss carryback deduction
KEY: These add-backs prevent circular calculations. The DRD reduces taxable income but does not create or increase an NOL. A corporation cannot use a prior NOL to generate a current NOL.
Common mistakes
- Applying the 80% limitation to pre-2018 NOLs. The 80% taxable income cap applies only to losses arising after December 31, 2017. Pre-2018 NOLs retain 100% utilization but have a 20-year expiration. Trap: "apply 80% to all NOL carryforwards." Correct: sequence matters. Use pre-2018 losses first at 100%.
- Using FMV of acquired stock instead of loss corporation FMV for §382. The §382 limitation uses the fair market value of the loss corporation, not the acquisition price if the acquirer pays a premium. Trap: "buyer paid $5 million, so the base is $5 million." Correct: FMV of loss corporation's equity immediately before the change.
- Forgetting to prorate the §382 limitation for short tax years. When an ownership change occurs mid-year, the annual limitation must be prorated based on days remaining. Trap: "full annual limit applies in the change year." Correct: prorate by days in the short period.
Bottom line
- C corporation NOL equals the excess of deductions over gross income, computed without the dividends-received deduction, NOL deduction, or capital loss carryback
- Post-2017 NOLs carry forward indefinitely but are limited to 80% of taxable income (computed without the NOL deduction)
- Pre-2018 NOLs retain 100% utilization and must be used before post-2017 losses under FIFO ordering
- Section 382 limits annual NOL utilization after an ownership change to FMV of the loss corporation times the long-term tax-exempt rate
Exam shortcut
"382 = FMV × Rate". For ownership change questions, immediately multiply the loss corporation's fair market value by the long-term tax-exempt rate to find the annual cap. Prorate for short years. "80% = Post-17 Only". When an NOL question mentions both old and new losses, use pre-2018 losses at 100% first, then apply 80% to the remainder. The limitation never applies to pre-TCJA carryforwards. "Capital = 3-Back, 5-Forward, Always Short".
The full lesson (about 2,583 words, 17 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.A1
Browse all free CPA TCP lessons or jump into free CPA TCP practice questions.