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REG CPA Practice Questions Explained: C Corporation NOLs and NCLs

REG CPA Practice Questions Explained: C Corporation NOLs and NCLs

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In this video, we walk through 4 REG practice questions teaching the rules around and how to calculate C Corporation NOLs and NCLs. These questions are from REG content area 5 on the AICPA CPA exam blueprints: Federal Taxation of Entities.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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C Corporation NOLs and NCLs

Net Operating Losses (NOLs) Overview:

Pre-TCJA Rules:

Before the Tax Cuts and Jobs Act (TCJA) of 2017, C Corporations could carry back NOLs for two years to get a refund of previously paid taxes and could carry forward these losses for up to 20 years to reduce taxable income in future years. There was no limit to the percentage of taxable income that could be offset by NOLs.

Example Pre-TCJA: If Acme Corp. incurred a $1,000,000 NOL in 2016, it could apply this loss to its taxable income from 2014 and 2015 (carry back), potentially securing a refund. If any of the loss remained, it could be carried forward to offset taxable income through 2036.

Post-TCJA Rules:

The TCJA eliminated the two-year carryback for NOLs but allowed them to be carried forward indefinitely. It introduced a limitation that NOLs could only offset up to 80% of taxable income in carryforward years.

Example Post-TCJA: If Acme Corp. incurs a $1,000,000 NOL in 2021, it cannot carry back this loss to previous years. If Acme earns $1,000,000 in taxable income in 2022, it can only offset $800,000 of that income with the NOL from 2021, leaving $200,000 of income subject to tax.

CARES Act Adjustment:

The CARES Act of 2020 provided temporary relief from the TCJA changes by allowing a five-year carryback for NOLs incurred in the years 2018, 2019, and 2020, and suspending the 80% taxable income offset limit for those years.

Example During CARES Act: If Acme Corp. incurs a $1,000,000 NOL in 2020, it can carry back this loss to taxable years 2015 through 2019, potentially receiving refunds for those years. Moreover, if the loss is carried to 2021 or beyond, it can offset 100% of taxable income in those years, until the loss is fully absorbed.

Post-CARES Act Rules:

After the expiration of the CARES Act provisions, the rules reverted to the TCJA framework, with indefinite carryforwards and the 80% income offset limitation.

C Corporation Net Capital Losses Overview:

General Rule:

Net capital losses (when capital losses exceed capital gains) for C Corporations can only offset capital gains, not ordinary income. If a corporation has a net capital loss in a tax year, it can carry the loss back 3 years and forward 5 years to offset capital gains. The net capital loss is considered short-term.

Example: XYZ Corp. has short-term capital gains of $100,000 and short-term capital losses of $150,000 in 2023, resulting in a net capital loss of $50,000. XYZ cannot use this loss to reduce its ordinary income in 2023. Instead, it carries forward the $50,000 net capital loss to offset future capital gains if it cannot be carried back.

Interaction with NOLs:

Net capital losses do not directly affect the NOL calculation. When a corporation has both an NOL and net capital losses, the treatment of each remains distinct: NOLs can offset ordinary income (up to the 80% limit post-TCJA), while net capital losses carry forward to offset future capital gains only.

Example with Interaction: In 2023, XYZ Corp. has an operating loss of $300,000 and, as mentioned earlier, a net capital loss of $50,000. The $300,000 NOL can be carried forward to offset up to 80% of taxable income in future years. The $50,000 net capital loss carries forward separately to offset future capital gains.

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