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Net Operating Loss Deduction - Initial Review Guide

Disclaimer

  1. Is the loss attributable to the qualified taxpayer's business activities within the EDA prior to the EDA expiration date?  

    The EDA NOL deduction can only offset business income attributable to operations of the taxpayer within the designated EDA. Non-business income and/or loss are excluded from the calculation of the EDA NOL. If a business is located within and outside of an EDA, or in more than one EDA, the taxpayer must determine the portion of the total business loss that is attributable to the EDA.

    • Business loss is defined under the provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA).

    • Components of the factors are defined under the provisions of UDITPA

  2. Was the EDA NOL claimed on an original return? 

    The EDA NOL must be elected in the year the loss is incurred, and cannot be elected on an amended return absent special authority.  If an amended return was filed to elect this incentive, this is a statutory adjustment.  If the EDA NOL deduction is claimed in later years, verify an appropriate election was made in the year the loss was incurred.

  3. For combined reports, was the NOL properly intrastated and limited by the zone income limitation?

    To verify that the NOL deduction has been properly intrastated, check the statement of combined computation of net income to see if the NOL was used to reduce only the income of the corporation that is doing business in the zone.  If the NOL claimed exceeds the net income of that particular corporation, the NOL was not properly intrastated and an adjustment to disallow the excess NOL deduction may be necessary.

    • For LARZ taxpayers with taxable years beginning on or after 1/1/94: the corporation claiming the deduction must use the intrastated income (not the combined California income). Refer to the Computation of NOL Carryover and Carryover Limitations Worksheet (Worksheet VI, Section C). For the Apportioning Worksheet (Worksheet V), check to see that the total property and payroll within California is the California property and payroll only of the corporation claiming the deduction and not the combined California amount as reported on Schedule R-1.


    • For Enterprise Zone, Targeted Tax Area, and Local Agency Military Base Recovery Area taxpayers with taxable years beginning on or after 1/1/98: the corporation claiming the deduction must use the intrastated income (not the combined California income). Refer to the Computation of NOL Carryover and Carryover Limitations Worksheet (Worksheet VI, Section C). For the Apportioning Worksheet (Worksheet V), check to see that the total property and payroll within California is the California property and payroll only of the corporation claiming the deduction and not the combined California amount as reported on Schedule R-1.

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