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FAQs for Hurricane Victims - Net Operating Losses

FAQs for Victims of Hurricanes Katrina, Rita and Wilma, Victims of the May 4, 2007, Kansas Storms and Tornadoes, and Victims of the Midwestern Area Disasters of 2008

(03/09) Q: If a taxpayer has deductions that potentially generate more than one type of loss eligible for a special carryback period under the Net Operating Loss (NOL) provisions, what priority do the deductions have in determining the character of the NOL?

A: In the Gulf Opportunity Zone Act of 2005 (GOZA), Congress enacted several new Code provisions that provide for greater than normal NOL carryback periods for those portions of an NOL generated by several types of deductions. Section 1400N(i)(2) treats certain income and deductions attributable to qualified timber property as attributable to farming. Section 172(b)(1)(G) provides a five-taxable year carryback period for the portion of an NOL that qualifies as a farming loss. Section 1400N(j)(1) treats a taxpayer’s Gulf Opportunity Zone public utility casualty loss as a product liability deduction that generates a specified liability loss. Section 172(b)(1)(C) provides a 10-taxable year carryback period for the portion of an NOL that qualifies as a specified liability loss. Section 1400N(k) provides a five-taxable year NOL carryback period for the portion of an NOL that qualifies as a Qualified Gulf Opportunity Zone loss.

These special type losses may not exceed the amount of the taxpayer’s NOL for the taxable year. Situations may arise where the total amount of net deductions that could generate the special type losses, discussed above, exceeds the total amount of the taxpayer’s NOL for the taxable year. For example, a taxpayer has $40,000 worth of net qualified timber losses and $10,000 of other income attributable to farming, $10,000 of deductions that could generate a Gulf Opportunity Zone public utility casualty loss and no other deductions that could generate a specified liability loss, and $50,000 of net deductions that could generate a Qualified Gulf Opportunity Zone Loss. However, the taxpayer only has an NOL of $50,000 making it necessary to determine which types of deductions take priority in determining the character of the NOL.

Based on the manner in which the various types of losses are defined in the Code, in the example the priority order would be as follows: (1) net farming losses, (2) net Gulf Opportunity Zone public utility casualty loss deductions, and (3) net Qualified Gulf Opportunity Zone loss deductions.  The $50,000 NOL would consist of the following components (1) $30,000 farming loss ($40,000-$10,000), (2) $10,000 Gulf Opportunity public utility casualty loss, and (3) $10,000 Qualified Gulf Opportunity Zone loss.

In addition, all of the special type deductions discussed above take priority over those deductions that may generate an NOL that qualifies for either the normal two-taxable year carryback period under § 172(b)(1)(A) or the three-taxable year carryback period under § 172(b)(1)(F).  Deductions that generate any portion of an NOL that qualifies for the three-taxable year carryback period provided by § 172(b)(1)(F) take priority over deductions that generate an NOL that qualifies for the normal two-taxable year carryback period under § 172(b)(1)(A).

The GO Zone provisions described above were made available to victims of the May 4, 2007 Kansas storms and tornadoes through the Food Conservation and Energy Act of 2008.  See Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes.  Similarly, the GO Zone provisions were made available to affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

(03/09) Q: May a taxpayer make a split election with regard to a single NOL?  That is, for a given NOL, may a taxpayer elect to waive all of the possible carryback periods for one or more of the types of losses discussed in Question 1 while retaining the carryback periods for other types of losses?

A: Section 172(b)(3) provides that  a taxpayer entitled to a carryback period under paragraph (1) of § 172(b) may elect to relinquish the entire carryback period with respect to an NOL for any taxable year.  There may be multiple carryback periods with regard to different portions of an NOL for a taxable year.  Generally, if a taxpayer makes a § 172(b)(3) election with respect to an NOL, that election waives all of the carryback periods for that NOL.

However, § 1.172-13(c)(4) of the Income Tax Regulations provides that if a taxpayer has an NOL that consists in part of a product liability loss, an election to forego the carryback period under § 172(b)(3) does not preclude the product liability loss from being carried back 10 taxable years.  The regulation allows a taxpayer to waive the carryback period with respect to the portion of the NOL that would be carried back under the normal NOL carryback rules and retain the 10-year carryback period with respect to the product liability loss.

Section 1400N(j)(1) treats a taxpayer’s Gulf Opportunity Zone public utility casualty loss as a product liability loss deduction.  Therefore, the type of split election allowed in the product liability regulations applies to a Gulf Opportunity Zone public utility casualty loss.

There are various NOL provisions that allow a taxpayer to forego the special extended carryback period allowed for certain losses while continuing to carry the loss back to taxable years to which it otherwise would be carried if it were not a special type of loss.  These are not split elections and are explicitly allowed by the Code.

Similar results apply to victims of the May 4, 2007 Kansas storms and tornadoes (see Publication 4492-A) and affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B.

(03/09) Q: The GO Zone legislation says taxpayers in the effected area are allowed to carry back losses attributable to Hurricane Katrina for five years.  Under tax law established prior to Hurricane Katrina (Internal Revenue Code Section 172), taxpayers are allowed to claim Katrina losses on their 2004 tax return either as an amended return or if they have not yet filed, on their regular 2004 tax return and carry the loss back for three years.

Does this mean a taxpayer could carry the Katrina loss on the 2005 tax return back to 2000, but if the loss is taken on the 2004 tax year the carry back is only to 2001?

A: Under § 165(i) of the Internal Revenue Code, a taxpayer who incurs a loss attributable to a federally -declared disaster may elect to take the loss into account for the taxable year immediately preceding the taxable year in which the disaster occurred.  If this election is made, the loss is treated as having occurred in the preceding tax year for which the deduction is claimed.

Section 172 provides rules for the carryback and carryover of a NOL.  In general, the NOL carryback period is two tax years (or three tax years if the loss is from a casualty or theft).

Section 1400N(k) provides a five-year carryback for the portion of a taxpayer’s NOL that is a qualified Gulf Opportunity Zone casualty loss.  However, § 1400N(k)(3)(C) provides that § 165(i) does not apply to any qualified GO Zone casualty loss to the extent such loss is taken into account under the § 1400N(k) five-year carryback provision.  Thus, under § 1400N(k)(3)(C), a taxpayer may use either § 165(i) to take the qualified GO Zone loss into account in the year preceding the disaster, or § 1400N(k) to use a five-year carryback period for the portion of the taxpayer’s NOL that is a qualified GO Zone loss.  Section 165(i) and § 1400N(k) cannot both be used for the same loss.

Similar results apply to victims of the May 4, 2007 Kansas storms and tornadoes (see Publication 4492-A) and affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B.

(03/09) Q: Is the special five-year carryback for qualified GO Zone net operating losses available for individuals or only businesses?

A: The five-year GO Zone net operating loss carryback does not apply to individuals.  It is allowed for qualified GO Zone losses.  Under Section 1400N of the Internal Revenue Code, one of the requirements for qualified GO Zone property is that substantially all of the use of the property be in the GO Zone and the property must be used in the active conduct of a trade or business by a taxpayer in such zone.

Individuals with a casualty loss sustained in a federally-declared disaster area are subject to the regular three year carryback period for net operating losses.

Similar results apply to victims of the May 4, 2007 Kansas storms and tornadoes (see Publication 4492-A) and affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B.

(03/09) Q: For those eligible for the special five-year carryback for qualified GO Zone net operating losses, can they opt the normal carryback period? Or are the only options to either elect the five-year carryback or waive it completely and go forward?

A: A taxpayer may waive the five-year carryback period for a GO Zone loss. The waiver does not affect the character of the loss. It is still a GO Zone loss and a GO Zone loss does not qualify as an eligible loss. So if a taxpayer waives the five-year carryback period for a GO Zone loss, the taxpayer may only carry the loss back two taxable years.

Similar results apply to victims of the May 4, 2007 Kansas storms and tornadoes (see Publication 4492-A) and affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B.

(03/09) Q: Form 1045, Application for Tentative Refund, can only be used to report a net operating loss within one year after the end of the year in which the loss arose.  Is there any exception to this deadline for the 2005 hurricanes?

A:  No. If a Form 1045, Application for Tentative Refund (PDF) is not filed for a loss that occurred in 2005 by December 31, 2006, the net operating loss must be reported on a Form 1040X, Amended U.S. Individual Income Tax Return (PDF).

Similar results apply to victims of the May 4, 2007 Kansas storms and tornadoes (see Publication 4492-A) and affected taxpayers in the Midwestern Disaster Areas by the Heartland Disaster Tax Relief Act of 2008, as identified in Table 1 of Publication 4492-B.

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Page Last Reviewed or Updated: 04-Aug-2014