PURPOSE: This rule explains the proper Missouri income tax treatment of net operating losses by corporations. Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by state law.

1. (1) Federal Taxable Income Not Less Than Zero (0). Federal taxable income is the starting point for computing Missouri taxable income. Federal taxable income, as it is used to compute Missouri taxable income, may not be less than zero (0) or a negative figure.

   1. (A) Example: In the current year taxpayer had a federal net operating loss of one (1) million dollars, of which one hundred twenty-five thousand dollars ($125,000) was attributable to Missouri income taxes. In a prior year, taxpayer had federal taxable income of $2,500,000. For this example, assume the taxpayer had no Missouri modifications to federal taxable income. Also assume the prior year return reflected a deduction of seven hundred fifty thousand ($750,000) for federal tax liability and after applying the net operating loss (NOL) the federal tax liability was reduced to four hundred fifty thousand dollars ($450,000). The taxpayer should determine his/her current and prior year Missouri income tax as follows: Current year Federal subtotal <$ 875,000> Mo. state income tax <$ 125,000> Federal NOL <$1,000,000> Mo. return line -1 $ 0 Mo. state income tax $ 125,000 Mo. taxable income $ 125,000 Mo. tax rate × 5% Mo. tax due $ 6,250 Prior year Federal taxable income $2,500,000 Minus NOL carry back <$1,000,000> Federal taxable income as amended $1,500,000 Minus federal tax liability $ 450,000 Mo. taxable income $1,050,000 Mo. tax rate × 5% Mo. tax due $ 52,500 Mo. tax paid on original return <$ 87,500> Mo. tax refund due <$ 35,000>*

*The thirty-five thousand dollar ($35,000) refund includes $6,250 attributable to the $125,000 deduction for state taxes.

1. (2) NOL.

   1. (A) Taxpayers who file a consolidated Missouri return must treat NOLs identically on the federal and Missouri returns.
   2. (B) Taxpayers who file separate federal and Missouri returns must treat NOLs identically on the federal and Missouri returns.

   3. (C) Consolidated Federal and Separate Missouri Return. Taxpayers who file consolidated federal and separate Missouri returns shall compute separate federal taxable income as if each member filed a separate federal return with the limitation that the taxpayer shall be bound by the election to carry losses forward or backward which is made on the consolidated return. If there is a consolidated gain, then the Missouri taxpayer may elect to carry loss backward or forward pursuant to Internal Revenue Code section 172.

      1. 1. Example: Company D files federal

consolidated and Missouri separate returns. In 1986, Company D has a federal consolidated loss of one hundred thousand dollars ($100,000), which it carries back for federal income tax purposes to its return for 1983, reducing federal taxable income and federal income tax liability. Assuming taxpayer has separate company loss to carry back from 1986, that loss may be deducted on its separate Missouri return for 1983. That loss may not be used to reduce federal taxable income on the Missouri return to a negative number. (3) Non-Missouri Source Losses. Net operating loss from a year when the loss company was not subjected to taxation by Missouri may not be used to determine Missouri taxable income.

1. (4) Recomputation of the Federal Income Tax Deduction for Separate Missouri Return Filers to Reflect Consolidated Return NOL. Taxpayer’s federal income tax deduction shall be determined as follow: 1) a fraction shall be created, the numerator of which is the taxpayer’s original taxable income reduced by its pro rata share of the consolidated loss and the denominator of which is the original consolidated taxable income reduced by total consolidated loss; and 2) total federal income tax of the consolidated group after deduction of the net operating loss is multiplied by the fraction to arrive at the adjusted federal income tax deduction.

   1. (A) Example: First, allocate the loss to the loss companies. Allocated Com- Line 30 To Total Consolidated pany Loss Percent Loss A ($ 50,000) 45.455% $34,091 B C ($ 50,000) 45.455% $34,091 D E ($ 10,000) 9.090% $ 6,818 ($110,000) 100% ($75,000) 12 CSR 10-2

Second, reduce original taxable income by the allocated loss.

1980 1983 New To 1139

Com- Original Allocated Taxable Total Tax pany Line 30 Loss Income Percent Liability A $1,000,000 ($34,091) $ 65,909 26.460% $19,845 B $ 50,000 $ 50,000 20.073% $15,055 C $ 25,000 ($34,091) D $ 100,000 $100,000 40.146% $30,110 E $ 40,000 ($ 6,818) $ 33,182 13.321% $ 9,990 $ 315,000 ($75,000) $249,091 100% $75,000

1. (B) Actual separate return loss will be used to compute separate return federal taxable income.

1. (5) Leaving a Consolidated Group. A former member of a consolidated group who filed a separate Missouri return must recompute its federal income tax deduction to reflect any decrease in consolidated federal income tax liability attributable to an NOL carry back by the group and to reflect any change in its relative share of federal income tax liability attributable to the net operating loss carry back by the group.
2. (6) Taxpayers who elect a proper method of computing the federal income tax deduction for a particular year shall continue to use that method to compute the effect of NOL on the federal income tax deduction for that year, regardless of the method used in the year of the loss.

AUTHORITY: section 143.961, RSMo 1986.* Original rule filed Oct. 22, 1986, effective March 26, 1987. Amended: Filed Feb. 23, 1989, effective Aug. 11, 1989.

*Original authority 1972. 2 CSR 10-2.170 Wood Energy Credit (Rescinded September 6, 1992)