2018 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, 2015, and to the California Revenue and Taxation Code (R&TC).

What's New

Federal Tax Reform

The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, made changes to the rules for Net Operating Losses (NOLs). California law does not conform to those changes. California taxpayers continue to compute NOLs in conformity to federal rules as of the specified date of January 1, 2015, with modifications.

General Information

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the R&TC in the instructions. Taxpayers should not consider the instructions as authoritative law.

• For taxable years beginning on or after January 1, 2014, and before January 1, 2024, taxpayers may deduct a disaster loss for any loss sustained in any city, county, or city and county in California that is proclaimed by the Governor to be in a state of emergency. For these Governor‑only declared disasters, subsequent state legislation is not required to activate the disaster loss provisions. Any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss (NOL) shall not apply to an NOL attributable to these specified disaster losses. The President’s declaration continues to activate the disaster loss provisions. For a list of all disasters declared by the President and/or the Governor, see the Declared Disasters list in Specific Line Instructions. For the most current listing of disasters that may have occurred after the finalization date of this publication, go to ftb.ca.gov and search for disaster loss for businesses.

Get FTB Pub. 1034, Disaster Loss How to Claim a State Tax Deduction, for more information.

• A corporation or exempt organization that expects an NOL in the 2019 taxable year, can file form FTB 3593, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, to extend the time for payment of taxes for the immediately preceding 2018 taxable year. This includes extending the time for payment of a tax deficiency. The payment of tax that can be postponed cannot exceed the expected overpayment from the carryback of the NOL. For more information, get form FTB 3593.
• California will allow NOLs incurred in taxable years beginning on or after January 1, 2013, to be carried back to each of the preceding two taxable years. For NOLs incurred in taxable years beginning on or after January 1, 2015, the carryback amount is 100% of the NOL. For more information, see Specific Line Instructions and the NOL Carryback table.
• The California NOL is figured the same way as the federal NOL, except that for California the carryback/carryover period and the amount to be carried back/carried over differ from federal allowances. See the NOL Carryback and NOL Carryover tables for more information.
• For taxable years beginning in 2010 and 2011, California suspended the NOL carryover deduction. Corporations continued to compute and carryover NOLs during the suspension period. However, corporations with net income after state adjustments (pre‑apportioned income) of less than $300,000 or with disaster loss carryovers were not affected by the NOL suspension rules.

  If taxpayers are required to be included in a combined report, the 2010 and 2011 NOL limitation amount of $300,000 or more shall apply to the aggregate amount of pre‑apportioned income for all members included in the combined report.

  For taxable years beginning in 2008 and 2009, California suspended the NOL carryover deduction. Corporations continued to compute and carryover an NOL during the suspension period. However, corporations with taxable income of less than $500,000 or with disaster loss carryovers are not affected by the NOL suspension rules.

• For NOLs incurred in taxable years beginning on or after January 1, 2008, California has extended the NOL carryover period from 10 taxable years to 20 taxable years following the year of the loss.

The carryover period for any NOL or NOL carryover, for which a deduction is disallowed because of the 2008-2011 suspension, are extended by:

• One year for losses incurred in taxable years beginning on or after January 1, 2010, and before January 1, 2011.
• Two years for losses incurred in taxable years beginning before January 1, 2010.
• Three years for losses incurred in taxable years beginning before January 1, 2009.
• Four years for losses incurred in taxable years beginning before January 1, 2008.

For more information, get FTB Legal Ruling 2011-04.

• For taxable years that began in 2002 and 2003, California suspended the NOL carryover deduction. Corporations continued to compute and carryover an NOL during the suspension period. However, the deduction for disaster losses was not affected by the NOL suspension rules.

  The carryover period for an NOL incurred in taxable years:

  • Beginning before January 1, 2002, have been extended for two years.
  • Beginning on or after January 1, 2002, and before January 1, 2003, have been extended for one year.

For more information, get FTB Legal Ruling 2011-04.

• The general NOL carryover percentage varies for NOLs incurred prior to January 1, 2004. See the NOL Carryover table for more information.
• The Franchise Tax Board (FTB) implemented the Principal Business Activity (PBA) Codes chart that is based on the North American Industry Classification System (NAICS) in the corporate tax booklets. However, the California Revenue and Taxation Code (R&TC) still uses the Standard Industrial Codes (SIC) for purposes of the new business and eligible small business NOL.

A. Purpose

Use form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations — Corporations, to figure the current year NOL and to limit NOL carryback/carryover and disaster loss carryover deductions.

Exempt trusts should use form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations — Individuals, Estates, and Trusts.

If the corporation elected to compute the NOL under the Enterprise Zone or Local Agency Military Base Recovery Area provisions prior to the 2014 taxable year, get form FTB 3805Z, Enterprise Zone Deduction and Credit Summary, or form FTB 3807, Local Agency Military Base Recovery Area Deduction and Credit Summary, for more information.

B. Apportioning Corporations

The loss carryover for a corporation that apportions income is the amount of the corporation’s loss, if any, after adding income or loss apportioned to California with income or loss allocable to California under Chapter 17 of the Corporation Tax Law. The loss carryover may be deducted from income of that corporation apportioned and allocable to California in subsequent taxable years.

C. Combined Reporting

Corporations that are members of a unitary group filing a single tax return must use intrastate apportionment, separately computing the loss carryover for each corporation in the group using its individual apportionment factors (R&TC Section 25108). Complete a separate form FTB 3805Q for each taxpayer included in the combined report. Attach the separate forms for each taxpayer member behind the combined form FTB 3805Q for all members.

Unlike the loss treatment for a federal consolidated tax return, a California loss carryover for one member in a combined report may not be applied to the income of another member included in the combined report. Get FTB Pub. 1061, Guidelines for Corporations Filing a Combined Report, for more information.

Note. If taxpayers are required to be included in a combined report, the 2010 and 2011 NOL limitation amount of $300,000 or more shall apply to the aggregate amount of pre‑apportioned income for all members included in the combined report.

D. Water’s-Edge

For water’s-edge taxpayers, R&TC Section 24416(c) imposes a limitation on the NOL deduction if the NOL is generated during a non-water’s-edge taxable year. The NOL carryover is limited to the lesser amount as re-determined by computing the income and factors of the original worldwide combined reporting group as if the water’s-edge election had been in force for the taxable year of the loss. If R&TC Section 24416(c) applies, the NOL carryover for each corporation may be decreased, but not increased.

E. S Corporations

An S corporation is allowed to carryover a loss that is incurred during a taxable year in which it has in effect a valid election to be treated as an S corporation. The loss is also separately calculated under the pass-through rules and passed to the shareholders in the year incurred and is taken into account in determining each shareholder’s NOL carryover, if any.

If a corporation changes from a C corporation to an S corporation, the loss incurred while the corporation was a C corporation may not be applied to offset income subject to the 1.5% tax imposed on an S corporation. However, losses incurred while the corporation was a C corporation may be applied against the built-in gains which are subject to tax. If the corporation incurred losses while it was a C corporation and an S corporation, and the S corporation is using C corporation losses to offset its built-in gains, the S corporation must complete two forms FTB 3805Q and attach them to Form 100S, California S Corporation Franchise or Income Tax Return. The unused losses incurred while the S corporation was a C corporation are “unavailable” except as provided for above unless and until the S corporation reverts back to a C corporation or the carryover period expires.

However, if an S corporation changes to a C corporation, any S corporation NOLs are lost.

F. Types of NOLs

The NOL Carryback and NOL Carryover tables in these instructions show the types of NOLs available, a description, the taxable year the NOLs were incurred, the percentages and carryback/carryover periods for each type of loss.

Specific Line Instructions

Part I – Current year NOL

Use Part I to figure the current year NOL eligible for carryback or carryover.

Line 2

If the corporation incurred a disaster loss during the 2018 taxable year, enter the amount of the loss on this line. Enter as a positive number.

Line 3

If the amount is zero or less, the corporation does not have a current year general NOL. Go to Part II for computation of general NOL carryovers, the current year disaster loss, and carryover from disaster losses.

Line 6

Enter the current year NOL on line 6. California will allow NOLs incurred in the current year to be carried back to each of the preceding two taxable years.

NOL carryback general rule

The corporation must first carry back the entire NOL incurred in 2018 to the preceding two years. Any loss not applied in the preceding two years can be carried forward up to 20 years. To determine the amount of NOL incurred in 2018 that can be carried back, complete Part III, NOL carryback, before completing Part I, lines 7 - 9.

Amended return

The corporation claims the NOL carryback by amending the 2016 and/or 2017 tax return using Form 100X, Amended Corporation Franchise or Income Tax Return, or Form 109, California Exempt Organization Business Income Tax Return.

Note: If the corporation claims the NOL as a carryback in any of the previous two years, file the applicable 2018 tax return and attach the completed 2018 form FTB 3805Q to the tax return.

After the 2018 tax return is filed, file the amended return for 2016 and/or 2017 to claim the NOL carryback deduction and provide the following explanation on Form 100X, Part V, line 2, Explanation of Changes: “2018 NOL carryback deduction”. For amended Form 109, attach a statement and provide the following explanation: “2018 NOL carryback deduction”. Do not attach the 2018 form FTB 3805Q to the 2016 or 2017 amended return. Attaching form FTB 3805Q may delay processing of the amended return.

Election to waive/relinquish NOL carryback

If the corporation would like to make the election to waive the two year carryback period for NOL incurred in 2018, check the box under the Election to waive carryback section. By making the election, the corporation is electing to carry an NOL forward instead of carrying it back in the previous two years. Once the election is made, it’s irrevocable.

If the corporation elects to waive the two-year carryback period and carry the NOL forward, go to Part II, Current Year NOLs, to record the corporation’s 2018 NOL carryover to 2019. Complete columns (b), (c), (d), and (h) only, for each type of loss that the corporation incurred.

If the corporation has an eligible qualified new business or a small business and the NOL is greater than the amount of net loss from such a business, use the general NOL first. If the corporation operates one or more new businesses and one or more eligible small businesses, determine the amount of the loss attributable to the new business(es), the small business(es), and the general NOL in the following manner. The NOL is first treated as a new business NOL to the extent of the loss from the new business. Any remaining NOL is then treated as an eligible small business NOL to the extent of the loss from the eligible small business. Any further remaining NOL is treated as an NOL under the general rules.

Line 9

Go to Part II, Current Year NOLs, to record the corporation’s 2018 NOL carryover to 2019. Complete columns (b), (c), (d), and (h) only, for each type of loss that the corporation incurred. See Part III, line 3, column (c) and column (i) for each type of loss that the corporation incurred.

Part II – NOL carryover and disaster loss carryover limitations

Use Part II to limit current year disaster loss and NOL carryover deductions to current year income and to record all of the corporation’s loss carryover information.

If the corporation has losses from more than one source and/or more than one category, the corporation must compute the allowable NOL carryover for each loss separately.

When to use an NOL carryover

Use the corporation’s NOLs and disaster losses in the order the losses were incurred. There is no requirement to deduct NOL carryovers before disaster loss carryovers.

Line 2 – Prior Year NOLs

Column (a) – Enter the year the loss was incurred.

Column (b) – If the loss is due to a disaster, enter the disaster code from the following Declared Disasters list. If the loss is from a new business or eligible small business, enter the SIC Code for the new business or eligible small business from the Standard Industrial Classification Manual. Do not enter the code from the PBA Codes chart available in the 2018 Form 100, Form 100W, or Form 100S Tax Booklets.

Declared Disasters:

*For taxable years beginning on or after January 1, 2014, and before January 1, 2024, corporations may deduct a disaster loss for Governor declared disasters. For these Governor declared disasters, subsequent state legislation is not required to activate the disaster loss provisions. Any law that suspends, defers, reduces, or otherwise diminishes the deduction of an NOL shall not apply to an NOL attributable to these specified disaster losses. For more information, see R&TC Section 24347.14 or the NOL Carryover table.

**Carryover period and percentage are limited to the NOL rules. No special state legislation was enacted.

***The Santa Cruz County Severe Storms (occurred in March 2011), the Los Angeles and San Bernardino County Severe Winds (occurred in November 2011), and the San Diego County Wildfires (occurred in May 2014), disaster loss deductions are allowed at 100% in the year the loss was incurred, or corporations can elect to deduct the disaster loss in the prior year under IRC Section 165(i). Any provision of law that suspends, defers, reduces, or otherwise diminishes the deduction of an NOL does not apply to an NOL attributable to these four counties. Refer to R&TC Sections 24347.11, 24347.12, and 24347.13 for more information.

If the Santa Cruz County Severe Storms or the Los Angeles and San Bernardino County Severe Winds disaster loss deduction creates an NOL (whether in the year of the loss or the prior year), the applicable NOL carryforward rule for the taxable year the NOL was created would apply. The NOL can be carried over for 20 years.

If the San Diego County Wildfires disaster loss deduction creates an NOL (whether in the year of the loss or the prior year), the applicable NOL carryback and carryforward rules for the taxable year the NOL was created would apply. The corporation must carryback the NOL attributable to the disaster loss for two years or elect to carryforward the NOL for 20 years.

**** Corporations that elected to deduct the disaster loss in the prior year under IRC Section 165(i), the final year to deduct the disaster loss carryover was last year. Corporations that did not elect IRC Section 165(i), the final year to deduct the disaster loss carryover is this year.

Column (c) – Enter the type of NOL: General (GEN), New Business (NB), Eligible Small Business (ESB), or Disaster (DIS). For more information, see the NOL Carryover table.

If using an Economic Development Area (EDA) NOL, get the applicable form for the NOL type.

Column (d) – Enter 100% of the initial loss for the year given in column (a).

Column (e) – Enter the NOL carryover amount from the 2017 form FTB 3805Q, Part II, column (h).

Column (f) – Enter the smaller of the amount in column (e) or the amount in column (g) of the previous line.

Column (g) – Enter the result of subtracting column (f) from the balance in column (g) of the previous line.

Column (h) – Subtract the amount in column (f) from the amount in column (e) and enter the result.

Current Year NOLs

If a disaster loss occurs between the date of the publication and the end of the taxable year, go to ftb.ca.gov and search for disaster loss for businesses, for the updated disaster chart. Then follow the line 3 instructions.

Line 3 – Current Year Disaster Loss

If the corporation deducts the current year disaster loss on the current year tax return (did not elect IRC Section 165(i)):

• In column (d), enter your 2018 disaster loss from Part I, line 2.
• In column (f), enter the disaster loss used in 2018.
• In column (h), enter column (d) less column (f).
  

  Any remaining disaster loss amount would create an NOL for that taxable year. If the disaster loss deduction creates an NOL in the year of the loss, the applicable NOL carryback and carryforward rules for the taxable year the NOL was created would apply. The corporation must carryback the 2018 NOL attributable to the disaster loss for two years or elect to waive the carryback period and carryforward the NOL for 20 years. The corporation computes the NOL carryback in Part III or makes the election to waive the carryback period and carryforward the NOL in Part I.

  If the corporation still has remaining disaster NOL after applying the two‑year carryback, replace the amount in column (h) with the disaster NOL carryover amount from Part III, line 3, column (i).

If the corporation elected under IRC Section 165(i) to deduct the 2018 disaster loss on the 2017 tax return, any remaining disaster loss amount would create an NOL to which the applicable NOL carryback and carryforward rules for the taxable year the NOL was created would apply. The corporation must carryback the 2017 NOL attributable to the disaster loss for two years or elect to waive the carryback period and carryforward the NOL for 20 years.

If the corporation elects to waive the two year carryback period and carry the NOL forward, the corporation enters the disaster loss amount to be carried over to 2018 in Part II, line 2, column (e). Use the Prior Year NOL instructions for column (a) through column (h) except:

• In column (a), enter 2018.
• In column (b), enter the new disaster code.
• In column (d), enter the total disaster loss incurred in 2018.

Part III – NOL carryback

Line 3

General rule: The 2018 NOL must be carried back to the second preceding taxable year before the loss year. Any loss not used in the second preceding taxable year is then carried to the first preceding taxable year. Any loss not applied in the two preceding years is carried forward.

Column (b) – If the loss is from a new business or eligible small business, enter the SIC Code for the new business or eligible small business from the Standard Industrial Classification Manual. Do not enter the code from the PBA Codes chart available in the 2018 Form 100, Form 100W, or Form 100S Tax Booklets.

If the loss is due to a disaster, enter the disaster code from the Declared Disasters list included in these instructions.

Column (c) – Enter the type of NOL: General (GEN), New Business (NB), Eligible Small Business (ESB), or NOL attributable to a qualified disaster loss (DIS). For more information, see the NOL Carryback table on the next page.

Column (d) – Enter 100% of the initial loss for the year given in column (a).

For NOL attributable to a qualified disaster loss, enter the remaining disaster loss amount here (as applicable). The remaining disaster loss amount is figured by taking the initial current year disaster loss less the amount used in the current year (if applicable).

Column (e) – Enter the amount from line 3, column (d) or line 1, whichever is less. This is the amount of 2018 NOL carryback used for 2016. Also enter this amount on the:

• 2016 Form 100X, line 7, and amended 2016 tax return: Form 100, line 19; Form 100W, line 19; Form 100S, line 17; or Form 109, line 7.
• 2016 Form 100X, line 9, and amended 2016 tax return: Form 100, line 21; Form 100W, line 21; Form 100S, line 19; or Form 109, line 7; (for NOL attributable to a qualified disaster loss).

If the current year NOL is comprised of more than one type of loss, list each loss separately. To compute the amount of net income or taxable income available for offset by the NOL carryback, reduce the amount on line 1, 2017 net income or taxable income, by the amount of column (e) carryback used for the first type of loss and all subsequent types of losses. The total amount of NOL carryback used in column (e) should not exceed the 2017 net income or taxable income from line 1.

Column (f) – Subtract column (e) from column (d).

Column (g) – Enter the amount from line 3, column (f) or line 2, whichever is less. This is the amount of 2018 NOL carryback used for 2017. Also enter this amount on the:

• 2017 Form 100X, line 7, and amended 2017 tax return: Form 100, line 19; Form 100W, line 19; Form 100S, line 17; or Form 109, line 7.
• 2017 Form 100X, line 9, and amended 2017 tax return: Form 100, line 21; Form 100W, line 21; Form 100S, line 19; or Form 109, line 7; (for NOL attributable to a qualified disaster loss).

If the current year NOL is comprised of more than one type of loss, list each loss separately. To compute the amount of net income or taxable income available for offset by the NOL carryback, reduce the amount on line 2, 2016 net income or taxable income, by the amount of column (g) carryback used for the first type of loss and all subsequent types of losses. The total amount of NOL carryback used in column (g) should not exceed the 2016 net income or taxable income from line 2.

Column (h) – Subtract column (g) from column (f).

Column (i) – Subtract the sum of column (e) and column (g) from column (d).

NOL Carryback

NOL Carryover

*For NB, or ESB NOL incurred on or after 01/01/2000 and before 01/01/2004, the carryover period has expired.

Note: For GEN, NB, or ESB NOL incurred on or after 01/01/2004 and before 01/01/2005, 2018 is the last taxable year to claim the NOL carryover deduction.