830 CMR: DEPARTMENT OF REVENUE
830 CMR 63.00: TAXATION OF CORPORATIONS
830 CMR 63.00 is amended by adding the following section:
830 CMR 63.30.2: Net Operating Loss Deductions and Carryovers

(1) Statement of Purpose, Outline of Topics.

(a) Purpose of Regulation. This regulation, 830 CMR 63.30.2, explains how, and to what extent, a corporation may apply the deductions for net operating losses incurred in previous taxable years allowed by M.G.L. c. 63, § 30.5, as amended by St. 1992, c. 133, §§ 402 and 403, and St. 1988, c. 202, §10, in determining net income for a taxable year. This regulation applies only to the corporate excise imposed by M.G.L. c. 63.

(b) Outline of Topics. In order to facilitate the use of this regulation, 830 CMR 63.30.2, this subsection lists the sections contained in this regulation, 830 CMR 63.30.2.

(1) Statement of Purpose, Outline of Topics.
(2) Definitions.
(3) Allowance of Net Operating Loss Deduction.
(4) Computation of Net Operating Loss.
(5) Start‑up Corporation Net Operating Loss Deduction.
(6) General Net Operating Loss Deduction.
(7) Carryover of Net Operating Loss.
(8) Examples.
(9) S Corporations.
(10) Combined Groups.
(11) Mergers and Changes of Ownership.
(12) Supporting Schedule Required.

(2) Definitions. For purposes of this regulation, 830 CMR 63.30.2, the following terms shall have the following meanings, unless the context requires otherwise.

Code, the Internal Revenue Code, as amended and in effect for the taxable year.

Commissioner, the Commissioner of the Massachusetts Department of Revenue or the Commissioner's duly authorized representative.

Corporation, a business corporation organized under or subject to M.G.L. c. 156B, subject to the excise imposed by M.G.L. c. 63, § 32 or 32D(b), or a corporation, association, or organization established under laws other than those of Massachusetts, subject to the excise imposed by M.G.L. c. 63, §39 or 32D(b).

Deduction or deductions, the deductions for net operating losses incurred in previous taxable years allowed by either M.G.L. c. 63, § 30.5(b) or M.G.L. c. 63, § 30.5(c).

Documentary evidence, original source documents that substantiate a claim for the deduction, including but not limited to articles of incorporation, stock certificates, and tax returns, but generally not including affidavits.

Federal net operating loss, net operating loss computed under Code §172 for purposes of determining the federal net operating loss deduction.

Federal net operating loss deduction, the deduction for net operating loss incurred in previous taxable years allowed by Code §172.

General net operating loss deduction, the deduction for net operating losses incurred in previous taxable years allowed by M.G.L. c. 63, §30.5(b).

Net income for purposes of determining the general net operating loss deduction, net income determined under the provisions of M.G.L. c. 63, § 30.4, without regard to the net operating loss deduction allowed by M.G.L. c. 63, §30.5.

Net income, net income determined under M.G.L. c. 63, §30.4 for purposes of computing the income measure of the corporate excise.

Net operating loss, the amount by which the sum of the deductions allowed under M.G.L. c. 63, § 30.4, not including the deductions for net operating loss allowed by M.G.L. c. 63, § 30.5, and the dividends received deduction allowed by M.G.L. c. 63, § 38(a)(1), exceeds gross income determined under the provisions of M.G.L. c. 63, §30.3, for a taxable year.

Start‑up corporation net operating loss deduction, the deduction for net operating losses incurred in previous taxable years allowed by M.G.L. c. 63, §30.5(c).

Taxable year, any fiscal or calendar year or period for which a corporation is required to file a federal income tax return.

Taxable net income, net income less the Massachusetts dividends received deduction allowed by M.G.L. c. 63, §38(a)(1).

(3) Allowance of Net Operating Loss Deduction.

(a) General Rule. In calculating net income for a taxable year, corporations may claim one of the two following deductions for net operating losses incurred in previous taxable years:

1. Start‑up corporation net operating loss deduction. During the first five taxable years of its existence, a corporation may deduct losses incurred in previous taxable years, to the extent allowed by M.G.L. c. 63, §30.5(c), and this regulation, 830 CMR 63.30.2; or

2. General net operating loss deduction. A corporation may deduct losses incurred in taxable years ending on or after December 31, 1989, to the extent allowed by M.G.L. c. 63, §30.5(b), and this regulation, 830 CMR 63.30.2.

(b) Only One Deduction Available for Each Taxable Year. A corporation may claim only one of the two net operating loss deductions in any taxable year. Where a corporation qualifies for both deductions in a taxable year, the choice between the two deductions is left to the corporation's discretion.

(c) Switching Between the Two Deductions Allowed. A corporation's choice between the two deductions under 830 CMR 63.30.2(3)(b), above, is effective only for the taxable year for which the deduction is claimed. A corporation may switch between the two deductions from one taxable year to another. Net operating loss incurred in a single taxable year may be split between the two net operating loss deductions claimed in two subsequent taxable years. However, where a corporation switches from the start‑up corporation net operating loss deduction to the general net operating loss deduction, the corporation may not deduct or carry over any amounts that were treated as non‑deductible losses under the start‑up corporation net operating loss restrictions described at 830 CMR 63.30.2(5)(b)2, and (c), below, to the extent that those restrictions were imposed in a previous taxable year for which the corporation claimed the start‑up corporation net operating loss deduction. See 830 CMR 63.30.2(7)(c)3, below.

(d) Deduction Available Only to Business Corporations. The deductions are available only in computing net income under M.G.L. c. 63, § 30.4 for purposes of computing a corporation's liability under the income measure of the corporate excise. The deductions are not available to any corporation whose liability under the corporate excise is not based on net income as defined under M.G.L. c. 63, § 30.4. Specifically, utility corporations subject to tax under M.G.L. c. 63, § 52A, and security corporations subject to tax under M.G.L. c. 63, §38B, are among those corporations that may not claim the deductions.

(4) Computation of Net Operating Loss.

(a) General. A corporation incurs a net operating loss for a taxable year if net income as defined in M.G.L. c. 63, § 30.4 for the taxable year, determined without regard to the net operating loss deductions allowed under M.G.L. c. 63, § 30.5, and reduced by the dividends received deduction allowed under M.G.L. c. 63, §38(a)(1), is less than zero.

(b) Computation of Net Operating Loss. The amount of net operating loss incurred in a taxable year is the amount by which the sum of the deductions allowed for the taxable year under M.G.L. c. 63, § 30.4, not including the deductions for net operating loss allowed by M.G.L. c. 63, § 30.5, and the dividends received deduction allowed under M.G.L. c. 63, § 38(a)(1), exceeds gross income as defined in M.G.L. c. 63, §30.3, for the taxable year.

(c) Required Adjustments. Where any provision of M.G.L. c. 63 requires net income to be adjusted, a corresponding adjustment must be made in computing net operating loss. For example, where M.G.L. c. 63, § 38H(b)(1), disallows a deduction under M.G.L. c. 63, § 30.4, with respect to expenditures for solar and wind power equipment deducted under M.G.L. c. 63, §38H(a), the disallowed deduction may not be taken into account in determining net operating loss. Other provisions of M.G.L. c. 63 that require adjustments to net operating loss include M.G.L. c. 31E(c), and 38M(b).

(d) Other Massachusetts Deductions, Adjustments, and Credits Disregarded. Net operating loss is determined solely with reference to M.G.L. c. 63, § 30 and §38(a)(1). Except as provided in 830 CMR 63.30.2(4)(c), above, any deductions, adjustments, and credits allowed by other provisions of M.G.L. c. 63 are disregarded in determining net operating loss. Specifically, the following items are disregarded:

1. Post‑apportionment deductions. Net operating loss is computed without regard to the deductions from taxable net income apportioned to Massachusetts that are allowed by M.G.L. c. 63, §§38F and 38H.

2. Massachusetts credits. Net operating loss is computed without regard to any of the credits against the corporate excise allowed by M.G.L. c. 63.

(e) Net Operating Loss Computed Before Apportionment. Where a corporation does business both within and without Massachusetts, the corporation's net operating loss is computed before applying the apportionment provisions of M.G.L. c. 63, §§38 and 42.

(5) Start‑up Corporation Net Operating Loss Deduction.

(a) General. Corporations that meet the eligibility requirements of 830 CMR 63.30.2(5)(b), below, may deduct net operating losses, as computed under 830 CMR 63.30.2(4), above, incurred in previous taxable years ending on or after December 31, 1975. The portion of the start‑up corporation net operating loss deduction that is not used in a taxable year may be carried forward to succeeding taxable years, subject to the limitations described at 830 CMR 63.30.2(5)(c), and (7), below.

(b) Eligibility for the Deduction. To claim the start‑up corporation net operating loss deduction for a taxable year, a corporation must meet all of the following requirements at all times during the taxable year:

1. First Five Years. The corporation must be in one of its first five consecutive taxable years of existence, measured from the earliest date of the corporation's establishment, organization, incorporation, or charter, whether the corporation was established, organized, incorporated, or chartered under the laws of Massachusetts or another jurisdiction; and

2. Ownership of Voting Stock. No other corporation, whether or not taxable in Massachusetts, may own fifty percent or more of the voting stock of the corporation.

(c) Restrictions on the Deduction. The following items of loss do not qualify for the start‑up corporation net operating loss deduction:

1. Certain losses incurred by foreign corporations. Net operating losses incurred by a foreign corporation in previous taxable years during which the corporation was not subject to the Massachusetts corporate excise are not treated as net operating losses for purposes of determining the start‑up corporation net operating loss deduction; and

2. Net operating losses carried back for federal net operating loss purposes. The start‑up corporation net operating loss deduction is not available for any portion of the net operating loss incurred in a taxable year that is carried back to a previous taxable year for purposes of determining the federal net operating loss deduction.

(d) Computation of the Start‑up Corporation Net Operating Loss Deduction. The amount of the start‑up corporation net operating loss deduction for a taxable year is the sum of the net operating losses available for carryover from each of the corporation's four previous taxable years, as determined under 830 CMR 63.30.2(7)(c) and (d), below. The amount of net operating loss available for carryover from a previous taxable year is the net operating loss for the taxable year as determined under 830 CMR 63.30.2(4), not including losses incurred by foreign corporations in taxable years during which they are not subject to the corporate excise, reduced by the amount of the net operating loss previously deducted, as required by 830 CMR 63.30.2(7)(c)4, below, and further reduced by the amount of the net operating loss carried back to previous taxable years for federal net operating loss purposes, as required by 830 CMR 63.30.2(7)(c)2, below.

1. Net operating losses previously deducted. The amount of net operating losses previously deducted is the amount of net operating loss incurred in a taxable year that already has been deducted under the provisions of M.G.L. c. 63, §30.5, and this regulation, 830 CMR 63.30.2, in taxable years beginning after the taxable year in which the loss occurred and before the taxable year for which the deduction is being computed. See 830 CMR 63.30.2(7)(c)4, below.

2. Net operating losses carried back for federal purposes. The amount of net operating loss carried back for federal net operating loss purposes is the amount of net operating loss incurred in a taxable year that was carried back to taxable years beginning before the year of the loss under Code §172(b)(1)(A)(i) for purposes of computing the federal net operating loss deduction. See 830 CMR 63.30.2(7)(c)2, below.

(e) Evidence. Any corporation that claims the start‑up corporation net operating loss deduction must upon request furnish to the Commissioner documentary evidence as defined at 830 CMR 63.30.2(2), above, to substantiate the claim.

(6) General Net Operating Loss Deduction.

(a) General. A corporation that does not claim the start‑up corporation net operating loss deduction described at 830 CMR 63.30.2(5), above, may claim the general net operating loss deduction with respect to net operating losses, as computed under 830 CMR 63.30.2(4), above, incurred in previous taxable years ending on or after December 31, 1989. The amount of the general net operating loss deduction for a taxable year shall not exceed the limitations imposed by M.G.L. c. 63, §30.5(b)(1)‑(4), as set forth at 830 CMR 63.30.2(6)(b), below. The amount of net operating loss that is disallowed as a deduction in a taxable year because of those limitations may be carried over to succeeding taxable years under the carryover rules at 830 CMR 63.30.2(7), below.

(b) Limitation of the Deduction. The amount of the general net operating loss deduction may not exceed the following amounts for the following taxable years:

1. For taxable years ending on or after December 31, 1990 and before December 31, 1991, the amount of the deduction may not exceed twenty‑five percent of the corporation's net income as computed under 830 CMR 63.30.2(6)(c), below;

2. For taxable years ending on or after December 31, 1991 and before December 31, 1992, the amount of the deduction may not exceed fifty percent of the corporation's net income as computed under 830 CMR 63.30.2(6)(c), below;

3. For taxable years ending on or after December 31, 1992 and before December 31, 1993, the amount of the deduction may not exceed seventy‑five percent of the corporation's net income as computed under 830 CMR 63.30.2(6)(c), below; and

4. For taxable years ending on or after December 31, 1993, the amount of the deduction may not exceed one hundred percent of the corporation's net income as computed under 830 CMR 63.30.2(6)(c), below.

The amount of net operating loss disallowed as a deduction for a taxable year because of the foregoing limitations may be carried forward to subsequent taxable years to the extent allowed under the carryover rules of 830 CMR 63.30.2(7), below.

(c) Net Income Defined for Purposes of Applying the Limitations on the General Net Operating Loss Deduction. For purposes of applying the limitations on the amount of the general net operating loss deduction set forth at 830 CMR 63.30.2(6)(b), above, net income for a taxable year is net income as defined in M.G.L. c. 63, § 30.4, determined without regard to the net operating loss deductions allowed under M.G.L. c. 63, § 30.5, and before applying the apportionment provisions of M.G.L. c. 63, §§ 38 and 42. Net income for purposes of applying the limitation is computed solely with reference to M.G.L. c. 63, § 30.4, and without regard to the dividends received deduction allowed under M.G.L. c. 63, §38(a)(1) or the items described in 830 CMR 63.30.2(4)(d), above.

(d) Computation of the General Net Operating Loss Deduction. The amount of the general net operating loss deduction for a taxable year is the lesser of the sum of the net operating losses available for carryover from previous taxable years under the provisions of 830 CMR 63.30.2(7), below, or the maximum amount of the deduction determined under the limitation provisions of 830 CMR 63.30.2(6)(b), above.

1. Net operating losses available for carryover. The amount of net operating loss available for carryover from a previous taxable year is the net operating loss for the taxable year as determined under 830 CMR 63.30.2(4), above, that may be carried over under the provisions of 830 CMR 63.30.2(7), below, reduced by the amount of the net operating loss for such taxable year that has been previously deducted.

2. Net operating losses previously deducted. The amount of net operating loss previously deducted is the amount of net operating loss incurred in a taxable year that already has been deducted under the provisions of M.G.L. c. 63, §30.5, in taxable years beginning after the taxable year in which the loss occurred and before the taxable year for which the deduction is being computed. See 830 CMR 63.30.2(7)(c)4.

(7) Carryover of Net Operating Loss.

(a) General. A net operating loss incurred in a taxable year may be carried over to succeeding taxable years as follows.

1. Start‑up corporation net operating loss. For purposes of determining the start‑up corporation net operating loss deduction described at 830 CMR 63.30.2(5), above, a net operating loss may be carried forward to any succeeding taxable year that ends less than five calendar years after the date on which the corporation was organized.

2. General net operating loss. For purposes of determining the general net operating loss deduction described at 830 CMR 63.30.2(6), above, a net operating loss may be carried forward to the five succeeding taxable years following the year in which the loss was incurred.

(b) Ordering Rules. Net operating loss carryover shall be deducted after all current deductions allowed in determining current taxable net income, including the dividends received deduction allowed by M.G.L. c. 63, §38(a)(1). Net operating loss must be carried over to the earliest succeeding taxable year in which it may be used. The portion of the net operating loss that is not used in the earliest succeeding taxable year may be carried over to a subsequent succeeding taxable year within the applicable carryover period set forth at 830 CMR 63.30.2(7)(a), above.

(c) Carryover. The amount of net operating loss incurred in a given taxable year that may be carried over to a succeeding taxable year is determined using the following steps.

1. Compute the net operating loss for the taxable year under the provisions of 830 CMR 63.30.2(4), above. For purposes of computing the start‑up corporation net operating loss, losses incurred by a foreign corporation in a taxable year during which the corporation is not subject to the corporate excise are not treated as net operating losses and are not eligible for the start‑up corporation net operating loss deduction. The net operating loss for the taxable year must be determined under the law applicable to the taxable year in which the loss was incurred without regard to the law applicable to the taxable year to which the net operating loss is being carried. The result is the corporation's tentative net operating loss carryover from the taxable year in which the loss was incurred.

2. In determining the carryover amount for start‑up corporation net operating loss purposes only, subtract from the tentative net operating loss carryover, as determined under 830 CMR 63.30.3(7)(c)1, above, the amount of such net operating loss that was carried back to taxable years preceding the year of the loss for federal net operating loss purposes under Code §172(b)(1)(A)(i). In determining the carryover amount for general net operating loss purposes, skip this step and go directly to step 3.

3. In determining the carryover amount for general net operating loss purposes only, subtract from the tentative net operating loss carryover, as determined under 830 CMR 63.30.3(7)(c)1, above, the following amounts:

a. The amount of such net operating loss that was carried back for federal purposes and was therefore treated as a non‑deductible loss under the restrictions described at 830 CMR 63.30.2 (5)(c)2, (5)(d)2, and (7)(c)2, above, in any taxable year for which the corporation claimed the start‑up corporation net operating loss deduction; and

b. The amount of such net operating loss that was incurred in a taxable year during which the corporation was a foreign corporation not subject to the corporate excise and that was treated as a non‑deductible loss under the restrictions described at 830 CMR 63.30.2(5)(c)1, above, in any taxable year for which the corporation claimed the start‑up corporation net operating loss deduction; and

c. The amount of such net operating loss that was treated as a non‑deductible loss because of the restrictions placed on the deduction by subsidiaries under 830 CMR 63.30.2(5)(b)2, above, in any taxable year during which the corporation claimed the start‑up corporation net operating loss deduction.

In determining the carryover amount for start‑up corporation net operating loss purposes, skip this step and go directly to step 4.

4. Subtract from the tentative net operating loss carryover, as determined under 830 CMR 63.30.3(7)(c)1, above, the amount of such net operating loss that was deducted under the provisions of M.G.L. c. 63, § 30.5, in taxable years beginning after the taxable year in which the loss was incurred. The result is the amount of the net operating loss incurred in the taxable year that is available for carryover.

(d) Amount of Net Operating Loss Available for Carryover. The amount of the net operating loss that is available for carryover to a taxable year is the sum of the net operating loss available for carryover from previous taxable years, determined under 830 CMR 63.30.2(7)(c)1‑4, above, that may be carried over under the applicable limitations set forth at 830 CMR 63.30.2(7)(a), above.

(e) Unused Net Operating Loss. Net operating loss incurred in a taxable year that is not deducted within the period set forth at 830 CMR 63.30.2(7)(a), above, is lost and may not be deducted for Massachusetts corporate excise purposes.

(f) Short Taxable Years. A taxable year that consists of less than twelve months is treated as a full taxable year for purposes of this regulation, 830 CMR 63.30.2.

(g) Foreign Corporations Not Subject to Tax.

1. General. Taxable years during which a foreign corporation is not subject to the Massachusetts corporate excise are treated as taxable years for purposes of this regulation, 830 CMR 63.30.2.

2. Imported Losses. For purposes of claiming the general net operating loss deduction only, foreign corporations may carry over and deduct net operating losses, calculated under the provisions of this regulation, 830 CMR 63.30.2, that were incurred in taxable years during which the foreign corporation was not subject to the corporate excise. To claim the deduction with respect to such losses, the foreign corporation must complete a pro forma Massachusetts Schedule E showing the computation of Massachusetts net operating loss, Massachusetts net income and Massachusetts taxable net income for each such taxable year. Such pro forma schedules must be attached to the return for the taxable year for which the deduction is claimed.

3. Loss Carry Through. Net operating loss may be carried through taxable years during which the foreign corporation is not subject to the corporate excise. However, where the corporation has positive taxable net income determined without regard to the net operating loss deduction in any such taxable year, the amount of net operating loss that may be carried through that year must be reduced by the amount of such taxable net income. A corporation that claims the deduction with respect to any net operating loss carried through taxable years during which the corporation is not subject to the corporate excise must provide a supporting schedule that fully documents the amount of the deduction and the manner in which the deduction was computed, however the corporation need not file a corporate excise return for taxable years during which it is not subject to the corporate excise in order to preserve the net operating loss carryover.

(8) Examples. The following examples illustrate the provisions of 830 CMR 63.30.2(1)‑(7). For purposes of these examples assume that all of the corporations are calendar year taxpayers that file separate returns. Further assume that none of the corporations claims a Massachusetts dividends received deduction. The corporations do not carry any net operating loss back to previous taxable years for federal tax purposes unless specified in the example.

Example 1: Alpha Centauri, Inc., a Massachusetts business corporation, is organized and begins doing business exclusively in Massachusetts in 1989. All of Alpha Centauri's stock is owned by individuals. In 1989 Alpha Centauri incurs a net operating loss of $100,000. In 1990 Alpha Centauri has net income of $50,000, determined without regard to the net operating loss deduction.

Because Alpha Centauri is in its first five taxable years of existence and no other corporation owns fifty percent or more of its voting stock, Alpha Centauri is eligible for the start‑up corporation net operating loss deduction for 1990. Alternatively, as a business corporation, Alpha Centauri may claim the general net operating loss deduction. Alpha Centauri may deduct either of the following amounts in determining 1990 net income:

A start‑up corporation net operating loss deduction of $50,000, resulting in net income of $0 for 1990 and $50,000 of net operating loss available for carryover; or

A general net operating loss deduction of $12,500, computed by multiplying net income of $50,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction for 1990 (25%). The general net operating loss deduction results in net income of $38,500 and $87,500 of net operating loss available for carryover.

Example 2: Assume that in Example 1 Alpha Centauri elects to take the start‑up corporation net operating loss deduction. In 1991, Alpha Centauri has net income of $80,000, determined without regard to the net operating loss deduction. Alpha Centauri once again is eligible for both deductions, and may deduct either of the following amounts in determining 1991 net income:

A start‑up corporation net operating loss deduction of $50,000 (the amount of net operating loss available for carryover from 1990), resulting in net income of $30,000, and no net operating loss available for carryover; or

A general net operating loss deduction of $40,000, computed by multiplying net income of $80,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction for 1991 (50%). The general net operating loss deduction results in net income of $40,000, and net operating loss available for carryover of $10,000, computed by subtracting the 1991 general net operating loss deduction of $40,000, from the $50,000 of net operating loss Alpha Centauri has available for carryover after claiming the start‑up corporation net operating loss deduction in 1990.

Example 3: Betelgeuse, Inc. is a foreign corporation that has been in existence for ten years. In 1989 Betelgeuse does not do business in Massachusetts, but incurs a loss for the year. In 1990 Betelgeuse does business in Massachusetts and incurs a net operating loss of $40,000. In 1991, Betelgeuse does business in Massachusetts and has net income of $100,000, determined without regard to the net operating loss deduction. Betelgeuse's Massachusetts apportionment percentage is 10% for 1990 and 25% for 1991. Betelgeuse may claim the general net operating loss deduction for losses incurred in 1989 and 1990 when computing net income for 1991. The deduction is computed as follows:

To determine the amount of net operating loss available for carryover from 1989, Betelgeuse must compute Massachusetts net operating loss under the provisions of 830 CMR 63.30.2(4) in the same manner as if Betelgeuse were doing business in Massachusetts for that taxable year. Assume for the purposes of this example that Betelgeuse's net operating loss for 1989, determined in that manner, is $20,000. The amount of net operating loss available for carryover from 1990 is $40,000. The total amount of net operating loss available for deduction in 1991 is $60,000.

The maximum allowable amount of Betelgeuse's general net operating loss deduction for 1991 is $50,000, computed by multiplying net income of $100,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction for 1991 (50%).

Betelgeuse's net operating loss deduction for the taxable year is $50,000, the lesser of the $60,000 of net operating loss available for deduction or the $50,000 maximum deduction. Betelgeuse has net income of $50,000, computed by subtracting the $50,000 net operating loss deduction from $100,000 of net income, determined without regard to the net operating loss deduction. Betelgeuse's apportioned net income for 1991 is $12,500, determined by multiplying net income of $50,000 by Betelgeuse's apportionment percentage of 25%. Betelgeuse has $10,000 of net operating loss available for carryover. The entire $10,000 is attributable to 1990 net operating loss.

Example 4: Assume the same facts as in Example 4 and that Betelgeuse discontinues doing business in Massachusetts from 1992 through 1994. Betelgeuse has positive taxable net income (determined without regard to the net operating loss deduction) of $500 in 1992, $300 in 1993, and $200 in 1994. In 1995, Betelgeuse resumes doing business in Massachusetts and has net income of $8,000, determined without regard to the net operating loss deduction. Betelgeuse's Massachusetts apportionment percentage for 1995 is 20%. Betelgeuse may claim the general net operating loss deduction for losses incurred in 1990 when computing 1995 net income.

The amount available for carryover from 1990 is $9,000, determined by subtracting from the $40,000 net operating loss incurred in that year, the $30,000 of that loss that was deducted in 1991, and offsetting the resulting amount by the $1,000 of positive taxable net income earned between 1992 and 1994.

The maximum allowable amount of Betelgeuse's general net operating loss deduction for 1995 is $8,000, computed by multiplying net income of $8,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction for the taxable year (100%).

Betelgeuse's net operating loss deduction for the taxable year is $8,000 resulting in net income of $0, determined by subtracting the $8,000 net operating loss deduction from $8,000 of net income, determined without regard to the net operating loss deduction.

Betelgeuse has $1,000 of net operating loss attributable to 1990. Because losses may be carried forward only five taxable years from the year in which they are incurred, including taxable years during which a corporation does not do business in Massachusetts, the $1,000 of net operating loss is not available for carryover to subsequent taxable years.

Example 5: Cassiopeia Corporation is a Massachusetts business corporation that organizes and begins doing business in Massachusetts in 1988. In 1988, Cassiopeia has positive net income. In 1989, Cassiopeia incurs a net operating loss of $40,000. Cassiopeia carries $10,000 of the loss back to 1988 to reduce its 1988 income for federal tax purposes. The carry back of net operating loss is not permitted for Massachusetts purposes. Thus, for Massachusetts purposes Cassiopeia's 1988 net income is unaffected by its 1989 net operating loss. Cassiopeia has $40,000 of 1989 net operating loss available for carryover for Massachusetts purposes.

In 1990 Cassiopeia has net income of $20,000, determined without regard to the net operating loss deduction. In order to maximize the amount its 1990 deduction, Cassiopeia chooses the start‑up corporation net operating loss deduction for 1990. The amount of net operating loss available to Cassiopeia for purposes of the start‑up corporation deduction is $30,000, determined by subtracting from the $40,000 of loss available for carryover from 1989, the $10,000 of loss that was carried back to 1988 for federal tax purposes. (Had Cassiopeia elected to carry the 1989 net operating loss forward for federal tax purposes, the full amount of 1989 loss would have been available for carryover for Massachusetts purposes.) The amount of the start‑up corporation net operating loss deduction is $20,000, resulting in net income of $0 and $10,000 of 1989 net operating loss available for carryover.

Had Cassiopeia chosen the general net operating loss deduction for 1990, the amount of the deduction would have been $5,000, computed by multiplying net income of $20,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction (25%). Neither the 1990 general net operating loss deduction nor the amount of loss available for carryover from 1989 would be affected by the $10,000 of 1989 loss carried back for federal purposes. The general net operating loss would have resulted in net income of $15,000, and $35,000 of 1989 net operating loss available for carryover.

Example 6: Assume the same facts as in Example 5, and that Neutron Star, LTD, a Massachusetts corporation, acquires 50 percent of Cassiopeia's voting stock in 1991. Because another corporation owns fifty percent or more of Cassiopeia's voting stock, Cassiopeia is not eligible for the start‑up corporation net operating loss deduction for 1991.

In 1991, Cassiopeia has net income of $12,000, determined without regard to the net operating loss deduction. Cassiopeia may claim a general net operating loss deduction of $6,000, determined by adding the amounts of net operating loss available for carryover from previous taxable years and applying the applicable limitation to the deduction as follows:

The amount of net operating loss available for carryover from 1989 is $10,000 determined by subtracting from the $40,000 net operating loss incurred in that year, the $20,000 of that loss that was deducted in 1990, and the 10,000 of that loss that was carried back for federal tax purposes. Even though Cassiopeia is claiming the general net operating loss deduction for 1991, the $10,000 treated as non‑deductible in 1989 is eliminated from the pool of loss available for carryover under the restrictions described at 830 CMR 63.30.2(5)(c).

The maximum allowable deduction is $6,000, computed by multiplying Cassiopeia's net income of $12,000, determined without regard to the net operating loss deduction, by the percentage of net income allowable as a deduction for 1990 (50%). Cassiopeia's 1991 net operating loss deduction is $6,000, resulting in net income of $6,000 and $4,000 of 1989 net operating loss available for carryover.

Example 7: Dog Star, Inc. is a foreign corporation that begins doing business in Massachusetts in 1992. To compute its net operating loss available for carryover to 1992, Dog Star must determine its net operating loss, net income, and taxable net income for taxable years 1989 through 1991 as though it were doing business in Massachusetts. Dog Star applies the provisions of M.G.L. c. 63 and this regulation, 830 CMR 63.30.2, to those taxable years and determines that in 1989 and 1990 it incurred net operating losses of $15,000, and $10,000, respectively. In 1991 it had positive taxable net income of $12,000, determined without regard to the net operating loss deduction. Dog Star's total net operating loss available for carryover to 1992 is $13,000, determined by adding the 1990 net operating loss of $15,000 and the 1990 net operating loss of $10,000, and subtracting 1991 taxable net income of $12,000. Of the total net operating loss available for carryover to 1992, $3,000 is attributable to 1989, and $10,000 is attributable to 1990. Because the losses available for carryover to 1992 were incurred in taxable years during which Dog Star was not subject to the corporate excise, Dog Star may deduct those losses only if it chooses the general net operating loss deduction.

(9) S Corporations.

(a) General. A Massachusetts S corporation that is subject to the income measure of the corporate excise due to total receipts of six million dollars or more may claim a net operating loss deduction for net operating losses incurred in taxable years ending on or after December 31, 1989, as provided below. The deduction is available only in computing net income for purposes of determining the income measure of the corporate excise under M.G.L. c. 63, § 32D(b), and only to the extent that it would be allowed to a C corporation under the provisions M.G.L. c. 63, §30.5, and this regulation, 830 CMR 63.30.2. A Massachusetts S corporation may not deduct any net operating losses incurred in taxable years ending before December 31, 1989.

(b) Generation of Net Operating Loss. An S corporation can incur a net operating loss only in a taxable year during which it is subject to the income measure of the corporate excise due to total receipts of six million dollars or more. Losses incurred in taxable years during which the S corporation had total receipts of less than six million dollars are not net operating losses for purposes of M.G.L. c. 63, §30.5 and this regulation, 830 CMR 63.30.2.

(c) Carryover of S Corporation Losses. Subject to the carryover provisions of 830 CMR 63.30.2(7), above, an S corporation may carry a net operating loss through succeeding taxable years during which the S corporation has total receipts of less than six million dollars, and may deduct the loss in succeeding taxable years during which the corporation has total receipts of six million dollars or more. For purposes of applying the carryover provisions of 830 CMR 63.30.2(7), above, taxable years during which the S corporation has total receipts of less than six million dollars and short taxable years are treated as full taxable years.

(d) Deduction Restricted. A Massachusetts S corporation that receives income taxed to the S corporation for federal purposes may not deduct net operating losses from that income for purposes of computing its tax liability under M.G.L. c. 63, § 32D(a).

(10) Combined Groups. The net operating loss deduction and carryover amounts are computed separately, under the provisions of this regulation, 830 CMR 63.30.2, for each corporation that is a member of a combined group, as defined at 830 CMR 63.32B.1(2). The combined group itself, therefore has no net operating loss deduction or carryover. Net operating loss carried over by a member of the group may be used to reduce the combined net income of the group only under the circumstances and in the manner described in the net operating loss carryover provisions of the combined returns of income regulation at 830 CMR 63.32B.1(9). A member of a combined group that uses its net operating loss to reduce the combined net income of the group for a taxable year must reduce its net operating loss available for carryover in the manner required by 830 CMR 63.30.2(7)(c). The amount of the required reduction shall be the amount of the member's apportioned loss that was used to reduce the combined income of the group, divided by the member's apportionment percentage for the taxable year.

(11) Mergers and Changes of Ownership.

(a) Mergers. In the event of a merger of two or more corporations, the surviving corporation retains any net operating loss that it separately incurred before the merger, subject to the limitations of 830 CMR 63.30.2(11)(b), below. All of the net operating loss of a corporation absorbed in the merger is lost. The surviving corporation may not deduct or carry over the net operating loss of a corporation it absorbs. In the event of a consolidation of two or more previously existing corporations into a new corporation, the new corporation starts with no net operating loss. All of the net operating loss of the previously existing corporations is lost. The new corporation may not deduct or carry over any net operating loss incurred by any of the previously existing corporations before the consolidation.

(b) Changes in Ownership. Where a corporation undergoes an ownership change, as defined in Code § 382(g), the amount of the corporation's net income that may be offset by pre‑change net operating loss in any taxable year shall not exceed the limitation imposed by Code section 382, provided that the limitation shall be adjusted for differences between Massachusetts taxable net income and federal taxable income determined without regard to the federal net operating loss deduction. The adjustment shall be made for each taxable year by multiplying the Code §382 limitation by Massachusetts taxable net income, determined without regard to the net operating loss deduction, and dividing the resulting amount by federal taxable income, determined without regard to the federal net operating loss deduction. Any amount of net operating loss that cannot be deducted because of the limitation may be carried over as provided in 830 CMR 63.30.2(7), above.

(12) Supporting Schedule Required. To claim a net operating loss deduction for a taxable year a corporation must file with its tax return a Massachusetts Schedule E‑2. The Commissioner may require corporations to attach to Schedule E‑2 such additional information and schedules as the Commissioner determines are necessary for the administration of the deduction. The Commissioner will prescribe the form and content of any additional information and schedules in the instructions to Schedule E‑2 and in other public written statements.

REGULATORY AUTHORITY
830 CMR 63.30.2: M.G.L. c. 14, §6(l); M.G.L. c. 62C, § 3

REGULATORY HISTORY
Date of Promulgation: 1/1/93