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1998 Instructions for Form FTB 3805Q

Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Corporations

References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 1998, and to the California Revenue and Taxation Code (R&TC).

General Information

Note: If the corporation has a current year NOL

D Water’s-Edge

under R&TC Section 24416.2, 24416.5 and 24416.6

Each taxpayer’s NOL carryover is limited to the

(relating to EZ, LAMBRA or TTA NOLs), it must

In general, California tax law conforms to the Internal

amount determined by recomputing the income and

elect on its return for the income year in which the

Revenue Code (IRC) as of January 1, 1998.

factors of the original worldwide combined reporting

loss is incurred, to carry over the loss either under

However, there are continuing differences between

group as if the water’s-edge election had been in

that section or the loss under R&TC Section 24416

California and federal tax law. California has not

force for the year of the loss. The NOL carryover

(relating to general NOLs). The election is

conformed to the changes made to the IRC by the

may not be increased as a result of the

irrevocable. Get form FTB 3805Z, form FTB 3807 or

federal Internal Revenue Service (IRS) Restructuring

recomputation.

form FTB 3809 for more information.

and Reform Act of 1998 (Public Law 105-206) or the

Tax and Trade Relief Extension Act of 1998 (Public

E S Corporations

B Apportioning Corporations

Law 105-277).

An S corporation is allowed to carry over a loss that

The loss carryover for a corporation that apportions

What’s New

is incurred during a year in which it has in effect a

income is the amount of the corporation’s loss, if

valid election to be treated as an S corporation. The

any, after adding income or loss apportioned to

In 1998, the Franchise Tax Board (FTB)

loss is also passed through to the shareholders in

California with income or loss allocable to California

implemented the new principal business activity

the year incurred and is taken into account in

under Chapter 17 of the Bank and Corporation Tax

(PBA) code chart that is based on the North

determining each shareholder’s NOL carryover,

Law. The loss carryover may be deducted from

American Industrial Classification System (NAICS) in

if any.

income apportioned and allocable to California in

the corporate tax booklets. However, the California

subsequent years.

If a corporation changes from a C corporation to an

R&TC still uses the Standard Industrial Codes (SIC)

S corporation, the loss incurred while the corporation

for purposes of the new business and eligible small

C Combined Reporting

was a C corporation may not be applied to offset

business NOL.

income subject to the 1.5% tax imposed on an

Corporations that are members of a unitary group

A Purpose

S corporation. However, losses incurred while the

filing a single return must use intrastate

corporation was a C corporation may be applied

apportionment, separately computing the loss

Use form FTB 3805Q to figure the current year NOL

against the built-in gains which is subject to tax.

carryover for each corporation in the group using its

and to limit NOL and disaster loss carryover

If the corporation incurred losses while it was a

individual apportionment factors (R&TC

deductions.

C corporation and an S corporation, and the S

Section 25108). Complete a separate form

Note: Exempt trusts should use form FTB 3805V,

corporation is using C corporation losses to offset its

FTB 3805Q for EACH taxpayer included in the

Net Operating Loss (NOL) Computation and NOL

built-in gains, the corporation must complete two

combined report. Attach the form FTB 3805Q for

and Disaster Loss Limitations – Individuals, Estates

forms FTB 3805Q and attach them to Form 100S,

EACH taxpayer member included in the combined

and Trusts.

California S Corporation Franchise or Income Tax

report BEHIND the combined form FTB 3805Q for all

The California NOL is figured the same way as the

Return. The unused losses incurred while the

members.

federal NOL, except that for California:

corporation was a C corporation are ‘‘unavailable’’

•

Unlike the loss treatment for a federal consolidated

An NOL may be carried over only to future years

except as provided for above until the S corporation

return, a California loss carryover for one member in

(no carrybacks are allowed); and

reverts back to a C corporation or the carryover

•

a combined report may not be applied to the income

The carryover period and percentages differ from

period expires.

of another member included in the combined report.

federal allowances.

Get FTB Pub. 1061, Guidelines for Corporations

F Types of NOLs

Only a portion of the NOL may be eligible for

Filing a Combined Report, for more information.

The following table shows the types of NOL

carryover to future years because California has

available, a description, and the percentages and

established different categories of NOL. See General

carryover periods for each type of loss.

Information F for more information.

Year NOL

NOL

Carryover

Type of NOL and Description

Incurred

Carried Over

Period

General NOL (GEN)

1992-1998

50%

5 Years

1991

50%

6 Years

Available as a result of a loss incurred in years after 1986 and allowed under R&TC Section 24416.

1987-1990

50%

7 Years

Does not include losses incurred from activities that qualify as a new business or an eligible small business, an EZ,

LARZ, LAMBRA, TTA or disaster loss.

New Business NOL (NB) Get Legal Ruling 96-5 for more information.

Incurred by a trade or business that first commenced in California on or after January 1, 1994.

Year of

Operation

During the first three years of business, 100% of an NOL may be carried over for an extended period, but only to the

extent of the net loss from the new business.

Year 1

100%

8 Years

If a taxpayer’s NOL exceeds the net loss from the new business, the excess may be carried over as a general NOL.

Year 2

100%

7 Years

If a taxpayer acquires assets of an existing trade or business which is doing business in California, the trade or business

Year 3

100%

6 Years

thereafter conducted by the taxpayer or related person is not a new business if the fair market value (FMV) of the

acquired assets exceeds 20% of the FMV of the total assets of the trade or business conducted by the taxpayer or any

related person. To determine whether the acquired assets exceed 20% of the total assets, include only the assets that

continue to be used in the same trade or business activity as they were used in immediately prior to the acquisition. For

this purpose, the same trade or business activity means the same division classification listed in the SIC Manual, 1987

edition.

If a taxpayer or related person has been engaged in a trade or business in California within the preceding 36 months and

thereafter commences an additional trade or business in California, the additional trade or business qualifies as a new

business only if the activity is classified under a different division of the SIC Manual, 1987 edition.

Business activities conducted by the taxpayer or related persons wholly outside California are disregarded in determining

whether the trade or business conducted within California is a new business. Related persons are defined in IRC

Sections 267 or 318.

Effective January 1, 1997, the term ‘‘new business’’ includes any taxpayer engaged in biopharmaceutical activities or other

biotechnology activities described in Codes 2833 to 2836 of the SIC Manual. It also includes any taxpayer that has not

received regulatory approval for any product from the United States Food and Drug Administration. See R&TC

Section 24416(g)(7)(A), for more information.

(continued on next page)

FTB 3805Q 1998

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Instructions For Form Ftb 3805q - Net Operating Loss (Nol) Computation And Nol And Disaster Loss Limitations - Corporations - 1998

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