Did Louisiana preserve corporate charitable contributions that federal law converted into a net operating loss carryover?

Plain-English summary

A corporation lost the Louisiana deduction for any charitable-contribution carryover that federal law converted into a net operating loss carryover.

Louisiana did not use the federal net operating loss figure. It required the corporation to add back the federal NOL and compute a separate Louisiana NOL.

At the same time, Louisiana's charitable-contribution deduction followed the amount actually deducted on the federal return. If federal law converted part of the charitable carryover into an NOL carryover, Louisiana neither preserved it as a charitable deduction nor recognized it as part of the Louisiana NOL.

The ruling's example

A corporation contributed $10,000 and had $80,000 of income before NOL and charitable deductions, plus an $80,000 prior-year federal NOL carryover.

Federal law effectively converted $8,000 of the contribution into an NOL carryover and left $2,000 as a charitable carryover. The ruling said Louisiana could recognize the $2,000 only when it was later deducted federally. The converted $8,000 was completely lost for Louisiana income-tax purposes.

Why Louisiana did not follow the federal result

The ruling identified two separate state rules:

• Louisiana had its own NOL provisions rather than adopting the federal NOL computation.
• Louisiana piggybacked the federal charitable-contribution line item, without separately tracking current and carried-over contributions.

That combination created the lost deduction.

Common questions

Q: Did Louisiana accept the federal NOL carryover?

A: No. The corporation had to add it back and compute a Louisiana NOL.

Q: Could Louisiana still deduct the charitable carryover?

A: Only to the extent the amount appeared as a charitable-contribution deduction on the federal return.

Q: What happened to the amount federally converted into an NOL?

A: The ruling says it was lost for Louisiana income-tax purposes.

Q: Is this a current-law statement for every tax year?

A: No. It is the Department's 2006 treatment under the provisions discussed in the ruling.

Citations and references

• IRC § 170 and § 170(d)(2)(B) — corporate charitable-contribution limit and carryover adjustment
• IRC § 172(b)(2) — federal NOL computation used in the example
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-011

Original ruling text

Revenue Ruling
No. 06-011
August 7, 2006
Corporation Income Tax
Louisiana Treatment of the Federal Provisions Converting Excess Charitable Contributions into Net Operating Loss Carryovers Background Pursuant to IRC §170, a deduction for charitable contributions by a corporation is limited to 10% of the corporation’s taxable income without regard to certain deductions. Corporations that have net operating loss and charitable contributions carryovers must apply a special rule provided for in IRC §170(d)(2)(B) before computing the amount of charitable contributions and net operating losses that may be carried over to future tax years. This special rule requires that the excess contributions be reduced by the amount by which the excess reduces taxable income for purposes of determining the net operating loss carryover under IRC §172(b)(2) and increases a net operating loss carryover to a succeeding taxable year. The application of this special rule is illustrated in the following example. Example. A corporation, which reports its income on the calendar year basis, makes a charitable contribution of $10,000 during 2006. Its taxable income for 2006 is $80,000 before deductions for net operating loss and charitable contributions. The corporation has a net operating loss carryover from 2005 of $80,000. In the absence of the net operating loss deduction, the corporation would have been allowed a deduction for charitable contributions of $8,000 (10 percent of $80,000). After the application of the net operating loss deduction, the corporation is allowed no deduction for charitable contributions, and there is a tentative charitable contribution carryover from 2006 of $10,000. For purposes of determining the net operating loss carryover to 2007 and only for this purpose, the corporation computes its income for 2006 under section §172(b)(2) by deducting the $8,000 charitable contribution. The result is $72,000 (80,000-8,000) of income. Thus, after the $80,000 net operating loss carryover is applied against the $72,000 of taxable income for 2006 (computed in accordance with section §172(b)(2)), there remains an $8,000 net operating loss carryover to 2007. In effect, the $8,000 charitable contribution the corporation was not allowed to take in 2006 is converted to a net operating loss carryover. The remaining $2,000 charitable contribution is a charitable contribution carryover. For federal income tax purposes, the taxpayer will still ultimately have $10,000 in deductions. A portion is simply converted from a deduction for charitable contribution carryovers to a deduction for net operating loss carryovers. Issue Calculation of Louisiana corporation income tax liability begins with federal items of income and expense. However, Louisiana did not adopt the federal income tax provisions relating to net operating losses. The federal net operating loss figure is not used because Louisiana has its own

Revenue Ruling No. 06-011
Page 2 of 2
August 7, 2006
net operating loss provision. Furthermore, Louisiana’s net operating loss provision does not provide for the conversion of excess charitable contributions into net operating loss carryovers. Louisiana does have a line item deduction for charitable contributions that piggybacks the federal return; however, Louisiana does not distinguish the carried over contribution from the current year’s contributions. Whatever amount is deducted on the federal return is the amount deducted on the Louisiana return. Application The above-mentioned issues will cause difficulty for the corporation in the afore-mentioned example when filing its Louisiana income tax return. For Louisiana income tax purposes, the corporation will have to add back $80,000 of its federal net operating loss. Then, the corporation will have to compute its Louisiana net operating loss. Regardless of whether the corporation has taxable income after the application of its Louisiana net operating loss, it will not be able to use any of its $10,000 in charitable deductions. Since Louisiana piggybacks the federal charitable deduction line item, if the federal charitable contribution deduction is zero, the Louisiana charitable deduction will be zero. The only way that Louisiana will recognize the federal charitable contribution deduction is if it is taken on the corporation’s federal return. In 2007, if the corporation is allowed to claim the $2000 in charitable contributions for federal purposes, then the corporation can claim it for Louisiana income tax purposes. As for the other $8000 in charitable contributions that was effectively converted to a net operating loss carryover for federal purposes, it will be completely lost for Louisiana income tax purposes because Louisiana does not have a corresponding provision. Conclusion Louisiana did not adopt the federal income tax provisions relating to net operating losses. Any amounts of charitable contributions carryovers that are converted to net operating loss carryovers for federal income tax purposes will be lost for Louisiana income tax purposes. Interested parties should contact Taxpayer Services at 225-219-7318. Cynthia Bridges Secretary By: Nina S. Hunter, Attorney Policy Services Division

A Revenue Ruling is issued under the authority of LAC 61III.101 (C). A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is a written statement issued to apply principles of law to a specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a statement of the department's position and is binding on the department until superseded or modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.