280 R.I. Code R. 280-RICR-20-25-10.13

Current through December 26, 2024

Section 280-RICR-20-25-10.13 - Net Operating Losses

A. For purposes of this regulation, a tracing protocol shall apply to net operating losses (NOLs).

1. No deduction is allowable for a net operating loss sustained during any taxable year in which a taxpayer was not subject to Rhode Island business corporation tax.

2. For the year in which the loss is allowed, such loss is limited by the amount of that corporation's federal taxable income for that year.

3. NOLs created before January 1, 2015, are allowed to offset the income only of the corporation that created the NOL; the NOL cannot be shared with other members of the combined group.

4. NOLs created in tax years beginning on or after January 1, 2015, shall receive the same treatment by Rhode Island for purposes of combined reporting and the Rhode Island corporate tax as they do under IRC, 26 U.S.C. § 172, except that:

a. Any NOL included in determining the deduction shall be adjusted to reflect the inclusions for, and exclusions from, entire net income required under the applicable section of R.I. Gen. Laws Chapter 44-11;

b. The deduction shall not include any NOL sustained during any taxable year in which the member was not taxed under R.I. Gen. Laws Chapter 44-11; and

c. The deduction shall not exceed the deduction for the taxable year allowable under IRC, 26 U.S.C. § 172 - provided that the deduction for a taxable year may not be carried back to any other taxable year for Rhode Island purposes but shall only be allowable on a carryforward basis for the five (5) succeeding taxable years.

5. Groups that make the federal consolidated election (see § 10.9 of this Part) are nevertheless not allowed to carryback NOLs. Also, consolidated groups must follow the same tracing provisions as combined groups.

B. Departing member of combined group.

1. NOLs shall be carried forward from year to year separately by the individual entity that originally incurred the underlying loss. Therefore, such NOLs remain the tax attribute of that entity, although such carryforwards may be shared in some cases with the other taxable members of a combined group, as described in this § 10.13 of this Part.

2. In any case in which a taxable member of a combined group ceases to be a member of the combined group, any NOL carryforward owned by such taxpayer is no longer available for use by the other taxable members of the combined group with which the taxpayer was previously affiliated.

3. If the taxpayer member becomes a member of a new combined group, the taxpayer member shall not share the NOL carryforward with the taxable members of its new combined group unless one of the taxable members of the new combined group was also a member of the taxpayer member's combined group during the year the loss was incurred and all the other requirements described in § 10.13 of this Part are met.

4. In the event that a taxpayer member that has an NOL carryforward becomes a member of a new combined group, change of ownership rules may apply, although any amount of NOL carryforward that cannot be applied because of such limitations may be carried forward consistent with the rules and limitations described in § 10.13 of this Part.

5. In the event that a taxpayer member of a combined group has an NOL carryforward and subsequently takes part in a merger or consolidation, the NOL carryforward will not be lost if the taxpayer member liquidates or terminates as a result of the merger or consolidation. In such a situation, the NOL would follow into the surviving entity.

C. Examples: The following examples serve to illustrate some of the principles contained in § 10.13 of this Part.

1. November Corp., Oscar Corp., and Papa Corp. are C corporations that have common ownership, are engaged in a unitary business, and are members of a combined group. For Tax Year 2014, November Corp. was required to file a Rhode Island corporate income tax return, and did so. Oscar Corp. and Papa Corp. were not required to file.

2. November Corp. has a $200,000 NOL carryover from prior year(s). November has no other Rhode Island modifications. For Tax Year 2015, $100,000 of the NOL can be utilized to offset November's current year income of $100,000; the remaining $100,000 may be carried forward to subsequent years. Such treatment is allowed because November Corp. has been a Rhode Island filer for those prior years in which the losses were incurred.

3. Oscar Corp., prior to combined reporting, had no Rhode Island filing requirement. Oscar has an NOL carryover from prior years of $50,000. For Tax Year 2015, and for future tax years, Oscar's NOL is not allowed to be applied against the federal taxable income of the combined group because the loss was incurred in prior years when Oscar did not have a Rhode Island filing requirement. Papa Corp. has no NOL.

4. Under the Rhode Island combined reporting regime, the combined group must combine its income, but is allowed to use NOL carryovers only from those members that had a Rhode Island filing requirement in the year in which they incurred the loss.

5. Furthermore, the allowable loss that the combined group's Rhode Island member generated through Tax Year 2015 is limited by the amount of income of the Rhode Island member for tax year 2015.

Net Operating Loss-Tax Year 2015
November Corp	Oscar Corp	Papa Corp	Combined Group
Federal Taxable Income	$100,000	$100,000	$100,000	$300,000
NOL Carryover (Form TY 2014)	($200,000)	($50,000)	$0
NOL Carryover Allowable	($100,000)	$0	$0	($100,000)
Adjusted Taxable Income	$0	$100,000	$100,000	$200,000

6. In Tax Year 2016, assume that November, Oscar and Papa are C corporations that each has $50,000 in federal taxable income.

a. Of November's $100,000 NOL carryover, only $50,000 can be used to offset its income; the remainder of the NOL is carried to future years and applied to the extent allowable by statute. Oscar's $50,000 NOL still cannot be used for Rhode Island purposes because the loss was incurred in a year prior to Oscar's being required to file with Rhode Island.

Net Operating Loss-Tax Year 2016
November Corp	Oscar Corp	Papa Corp	Combined Group
Federal Taxable Income	$50,000	$50,000	$50,000	$150,000
NOL Carryover	($100,000)	($50,000)	$0
NOL Carryover Allowable	($50,000)	$0	$0	$50,000
Adjusted Taxable Income	$0	$50,000	$50,000	$100,000

7. Example

a. Quebec Corp., Romeo Corp., Sierra Corp., and Tango Corp. are C corporations that have common ownership, are engaged in a unitary business, and are members of a combined group. Before Tax Year 2015, only Quebec Corp. was required to file a Rhode Island corporate income tax return, and did so. In Tax Year 2015 (please see table below), Quebec, Romeo and Sierra Corp. each has $100 million in federal taxable income; Tango Corp. has a current year net loss of $800 million.

b. As a result, the combined group shows a net operating loss of $500 million for Tax Year 2015. As the example illustrates, Rhode Island law allows a combined group, for purposes of Rhode Island combined reporting, to use current year losses from the combined group's members - even from members that would not otherwise have a Rhode Island filing requirement if it were not for combined reporting.

Net Operating Loss-Tax Year 2015
Quebec Corp.	Romeo Corp.	Sierra Corp.	Tango Corp.	Combine d Group
Federal Taxable Income	$100	$100	$100	($800)	($500)

c. In Tax Year 2016 (please see table below), the four member corporations of the combined group each has $100 million in federal taxable income, for a total of $400 million. But because the combined group had a $500 million net operating loss carryover from Tax Year 2015, the first year in which mandatory unitary combined reporting applied in Rhode Island, the group's Tax Year 2016 federal taxable income of $400 million is offset for Rhode Island tax purposes, and the group carries forward the remaining $100 million NOL.

Net Operating Loss-Tax Year 2016
Quebec Corp.	Romeo Corp.	Sierra Corp.	Tango Corp.	Combine d Group
Federal Taxable Income	$100	$100	$100	$100	$400
Allowable NOL:					($400)
Adjusted Taxable Income:					$0

8. Example

a. Uniform Corp., Victor Corp., and Whiskey Corp. are C corporations that have common ownership, are engaged in a unitary business, and are a combined group. In Tax Year 2015, Uniform and Victor Corporations have a combined federal taxable income of $200 million, which is offset by Whiskey Corp.'s current year net operating loss of $400 million. Consequently, the combined group has a $200 million net loss for 2015. The combined group carries forward a $200 million NOL - because the NOL was generated in a year in which combined reporting was mandatory.

Net Operating Loss-Tax Year 2015
Uniform Corp.	Victor Corp.	Whiskey Corp.	Combined group
Federal Taxable	$100	$100	($400)	($200) current year

b. In Tax Year 2016, each corporation posts federal taxable income of $100 million. The group deducts its $200 million NOL carryover, generated in 2015, from its Tax Year 2016 federal taxable income of $300 million. That leaves $100 million in adjusted taxable income for 2016.

Net Operating Loss-Tax Year 2016
Uniform Corp.	Victor Corp.	Whiskey Corp.	Combined group
Federal Taxable Income	$100	$100	$100	$300
NOL carryover from 2015:				($200)
NOL carryover allowable deduction:				($200)
Combined group's adjusted taxable income:				$100

9. Example

a. January Corp. and February Corp. are Rhode Island C corporations under common ownership engaged in a unitary business and are subject to Rhode Island combined reporting for tax year 2015 and 2016. Due to a reorganization, the corporations are no longer part of a combined group under common ownership for 2017; they file as separate entities in Rhode Island for 2017. As the following table shows, only February Corp. may use the NOL carryforward for 2017 because February Corp. generated the loss in the first place.

Split up (dollars in thousands)
2015	2016	2017
January Corp.	$100	$50	$50 (Filing as Separate Entity)
February Corp.	($500)	$50	$50 ($300) ($250) (Filing as Separate Entity)
Tentative Totals:	($400)	$100 ($400) ($300)
Note: Carry $400 NOL to 2016.	Note: Apply $400 NOL from 2015 to TY 2016, leaving $300 NOL to carry to 2017.	Note: January has $50 in income for 2017 and files as separate entity. $300 NOL from 2016 applies only to February, reducing February's income to $0; remaining NOL of $250 carries forward to 2018 for February only.

10. Example

a. March Corp., April Corp., and May Corp. are Rhode Island C corporations under common ownership engaged in a unitary business and are subject to Rhode Island combined reporting for tax year 2015 and 2016. For 2017, March Corp. drops out of the group and June Corp. (a C corporation under common ownership) joins the group.

b. As the following table shows, only $100 of the NOL carryforward can be used in 2017, against the income of April Corp. and May Corp.; the NOL carryforward cannot be applied in 2017 against June Corp. in 2017 because June Corp. is new to the group that year - and June's income cannot be offset by a loss to which it was not a party.

New member of group (dollars in thousands)
2015	2016	2017
March Corp.	$100	$50	n/a
April Corp.	($500)	$50	$50
May Corp.	$100	$50	$50
June Corp.	n/a	n/a	$50
Total:	($300)	$100 ($300) ($150)	$100 ($150) ($50)	$50
Note: For 2015, $500 NOL wipes out group's income, leaving $300 NOL carryforward to 2016. For 2016, the group's $150 income is wiped out by the $300 NOL carryforward; carry forward $150 NOL to 2017. For 2017, June Corp. joins group; June's income cannot be offset by a loss to which it was not a party. Thus, the $150 NOL carried to 2017 wipes out April's and May's income only, leaving the group with $50 in income from June; the remaining $50 NOL is carried forward to 2018 - and can apply only to April's and May's income that year.

11. Example

a. July Corp. and August Corp. are Rhode Island C corporations under common ownership engaged in a unitary business and are subject to Rhode Island combined reporting for tax year 2015 and 2016. For 2017, September Corp. (a C corporation under common ownership) joins the group. As the following table shows, September Corp. has $60 in income for 2017, but only July Corp. and August Corp. get to use the NOL carryforward from 2016 - in other words, the group gets to use only $20 of the NOL; the remaining $80 NOL is carried forward.

New member of group (dollars in thousands)
2015	2016	2017
July Corp.	($100)	$50	$10
August Corp.	($100)	$50	$10
September Corp.	N/A	N/A	$60
Total:	($200)	$100 ($200) ($100)	$20 ($100) ($80)	$60
Note: For 2015, July and August each has current-year $100 NOL, which carries to 2016. For 2016, the NOL carryforward wipes out income, leaving $100 NOL for 2017. In 2017, $100 NOL carryforward can be used against income of July and August only; it cannot be applied against September's income because September is new to group that year. Thus, in effect, only $20 of the NOL can be used in 2017, leaving group with September Corp.'s $60 in income for that year. Remaining $80 NOL is carried forward to 2018, when it can be applied only to income of July and August.

12. Example

a. Anne Corp. and Betty Corp. are Rhode Island C corporations under common ownership engaged in a unitary business and are subject to Rhode Island combined reporting for tax year 2015 and 2016. For 2017, Anne Corp. becomes a stand-alone corporation; Betty Corp. and Clara Corp. merge to become Doris Corp.

b. Thus, the $100 NOL carried forward to 2017 can apply only to Anne Corp. (because it generated the loss in the first place), reducing its income to zero and resulting in a $50 NOL carryover only for Anne Corp. for 2018. In other words, the NOL tracks with Anne Corp. only; the newly formed entity Doris Corp. cannot use the NOL.

Combinations (dollars in thousands)
2015	2016	2017
Anne Corp.	($200)	$50	$50 Anne Becomes a Stand-Alone Corp.
Betty Corp.	$0	$50	Betty & Clara Merge to Form D
Clara Corp.	N/A	N/A	Betty & Clara Merge to Form D
Doris Corp.	N/A	N/A
Total:	($200)	$100 ($200) ($100)	$50 Anne Income ($100) Anne NOL ($50) Tracks with Anne

280 R.I. Code R. 280-RICR-20-25-10.13