The Massachusetts Department of Revenue has issued a directive that discusses the Massachusetts corporate excise and personal income tax treatment of net operating loss (NOL) carryforward for tax years after December 31, 2008, for S corporations and their qualified S corporation subsidiaries (QSubs). Specifically, the directive addresses the consequences of recent statutory changes with respect to the taxation of S corporations and their QSubs.
Generally, an S corporation filing its returns for a tax year after 2008 is permitted to use a loss carryforward that was generated by its QSub. To calculate the amount of the NOL, a QSub must calculate the income or loss for each year beginning with the taxable year after the loss year, whether or not the QSub was subject to the Massachusetts tax. The loss is then reduced by the QSub’s positive income amounts in succeeding tax years for the five-year carryforward period.
Carryforward Calculation
Specific to tax years prior to January 1, 2009, in order for an S corporation to use a loss carryforward that derives from a QSub, the QSub must perform a carryforward calculation for all intervening tax years. For tax years in which the QSub is subject to Massachusetts tax on its income the loss or income that is included in the carryforward calculation is the actual Massachusetts net income amount before apportionment. For years in which the QSub is not subject to the income tax, the QSub must perform a pro forma calculation of its income or loss for that year. The carryforward amount must be reduced by the income that derives from a year after the year in which the loss was generated. The calculation must be performed for each year until the QSub is no longer treated as a separate taxable entity or until the carryforward is fully depleted. If the NOL carryforward is fully depleted by reason of the calculation, the S corporation is not entitled to use any of the QSub’s carryforward.
Pre-apportionment and Post-apportionment Carryforward Rules
There are two different rules for calculating the amount of an NOL that can be carried forward because of recent statutory changes. For the 2009 tax year an S corporation can generally use an allowable loss carryforward amount and those losses are carried forward on a pre-apportionment basis. For tax years after January 1, 2010, an S corporation may use an allowable NOL carryforward amount but it must be determined and carried forward on a post-apportionment basis. Further, the amount of the loss carryforward taken by the S corporation that is attributable to an individual entity for a prior taxable year is determined in proportion to the amount of each entity’s carryforward loss available from that prior taxable year, subject to the relevant pre-apportionment or post-apportionment rules.
Finally, the directive provides examples on how to report NOL carryforwards on a return and how to report the use of the post-apportionment losses. Directive 12-3, Massachusetts Department of Revenue, June 27, 2012.
