Before deducting any net operating loss, a taxpayer with both business income and investment income in a taxable year to which a loss is carried back or carried forward must apportion the loss between business and investment income. There are two methods of apportioning the loss. The method which must be used depends upon the measure by which the taxpayer would have paid its tax before deducting any net operating loss. The two methods of apportioning the loss are— Method 1: Example 1: Example 2: Method 2: Example 3: Example 4:

Method 1:

If the tax would have been measured by entire net income, the amount of loss to be apportioned to (subtracted from) business income and investment income respectively, is computed by multiplying the net operating loss deduction by a ratio. The ratio is a fraction the numerator of which consists of investment income before deducting any net operating loss and the denominator of which is entire net income before deducting any net operating loss. The ratio may be expressed as a percentage.

Example 1:

For the taxable year 1970, a taxpayer has entire net income before the deduction of any net operating loss of $50,000 which includes investment income of $5,000 before the deduction of any net operating loss. The percentage is 10 percent.

Example 2:

If the taxpayer in Example 1 has a net operating loss deduction carried back from 1972 of $10,000, a business allocation of 75 percent and an investment allocation of 15 percent, the tax is computed as follows:

Method 2:

If the tax would have been measured by entire net income plus compensation paid to officers and to certain stockholders, the amount of loss to be apportioned to (subtracted from) business income and investment income, respectively, is computed by multiplying the net operating loss deduction by a percentage. The percentage is the result of a fraction the numerator of which consists of investment income before deducting any net operating loss and the denominator of which is 30 percent of the sum of entire net income before deducting any net operating loss, plus compensation paid to officers and to certain stockholders, less the exemption allowed pursuant to section 3-3.1 of this Part.

Example 3:

A taxpayer has entire net income before any net operating loss deduction of $18,000, officers' salaries of $69,000 and investment income of $4,320. The percentage is computed as follows:

Example 4:

If the taxpayer in Example 3 had a net operating loss deduction of $10,000, a business allocation of 75 percent and an investment allocation of 15 percent the tax would be computed as follows: