Earlier this year, the Missouri Department of Revenue amended the Missouri Code of State Regulations 12 Section 10-2.165 regarding net operating losses (NOLs) for corporate income tax returns. The amendment—among other things—updates the NOL rule to better account for changes in the law since the most recent amendment to the rule, accommodates some subsequent decisions from the Administrative Hearing Commission regarding the topic of NOLs, and specifies that nothing in the rule should be read to incorporate by reference a regulation, standard, or guideline of a federal agency. The rule is effective for the 2024 tax year for calendar year-end taxpayers. Notable highlights from the amendment are detailed below.
- The rule specifies that to the extent an NOL is carried backward for more than two years or carried forward for more than 20 years on the federal income tax return, that amount of the NOL generally must be added to federal taxable income in arriving at Missouri taxable income pursuant to §143.121.2(4), RSMo.
- Any amount of NOL taken against federal taxable income but disallowed for Missouri income tax purposes under §143.121.2(4), RSMo may be carried forward and taken against any income on the Missouri corporate income tax return for a period of not more than 20 years following the year of initial loss.
- The rule addresses the computation of the federal income tax deduction for separate Missouri return filers to reflect consolidated return NOL:
- First, a fraction shall be created, the numerator of which is the taxpayer’s original federal taxable income reduced by its pro rata share of the consolidated loss and the denominator of which is the original consolidated federal taxable income reduced by total consolidated loss;
- Next, total federal income tax of the consolidated group after deduction of the NOL is multiplied by the fraction, and then multiplied by 50% to arrive at the adjusted federal income tax deduction.
- When a member of an affiliated group of corporations that files a federal consolidated return files a separate Missouri return, or when a member included in a federal consolidated return is properly excluded from the Missouri consolidated return and its items of income and deduction are not included in the group’s Missouri consolidated return, then the carryover attributes for the Missouri return are likely to be different from the carryover attributes for the federal consolidated return. As a result, the taxpayer is required to provide a schedule identifying the source of each loss or deduction.
- The loss year referred to in §143.431.4, RSMo may include the loss year of another taxpayer if the NOL occurred in a loss year of another taxpayer. For example, in the situation of a corporate merger where the taxpayer whose loss year gave rise to the NOL did not survive the merger, the NOL addition modification must still be computed by reference to the addition and subtraction modifications for the loss year of the corporation that did not survive the merger. For purposes of §143.431.4, RSMo, if more than one NOL addition modification must be computed for a given tax year, the NOL addition modifications are computed in the same order that the NOLS are used as NOL deductions for federal income tax purposes.
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