Is the New York net operating loss deduction limited to the amount of the federal net operating loss deduction, and does that limitation require adjustments when assets are later disposed of?

Plain-English summary

Jusco (U.S.A.), Inc. asked how New York's net operating loss (NOL) deduction works under Article 9-A -- specifically, whether the New York NOL is limited to the federal NOL deduction (section 208.9(f)(3)), and whether that limitation creates burdens on later asset sales. The limitation had reduced its NOL carryforward by $593,332.

Yes -- the New York NOL deduction is capped at the federal amount. Section 208.9(f) governs the New York NOL deduction. Section 208.9(f)(1) explains how to compute the New York NOL for the loss year. But section 208.9(f)(3) limits the amount that can actually be carried back or forward and deducted in an income year to the NOL deduction allowed for federal income tax purposes under IRC section 172 for that same income year. In other words, the New York NOL deduction in any year can be no larger than the federal NOL deduction that year -- which is why Jusco's carryforward was reduced.

On the follow-on questions: where the New York NOL deduction is limited by section 208.9(f)(3), no adjustment to taxable gain or loss under section 208.9(a)(12) or (b)(11) is required upon a later disposal of assets, and the other entire-net-income adjustments under section 208.9(a), (b), and (g) are not affected by the NOL deduction. So the limitation does not place an undue burden on the taxpayer.

What this means for you

Your New York NOL deduction cannot exceed your federal NOL deduction

Even if your New York loss is larger, section 208.9(f)(3) caps the deduction allowed in a given year at the federal NOL deduction (IRC section 172) for that year.

The loss-year computation and the deduction limit are separate steps

Section 208.9(f)(1) computes the New York NOL for the loss year; section 208.9(f)(3) then limits how much is actually deductible in an income year to the federal figure.

No special asset-sale adjustment flows from the limitation

When the NOL deduction is reduced to the federal amount, you do not make additional gain/loss adjustments on a later asset disposal; the other section 208.9 modifications stay as they are.

Common questions

Q: Can I deduct my full New York net operating loss even if my federal NOL deduction is smaller?
A: No. Section 208.9(f)(3) limits your New York NOL deduction in any year to the federal NOL deduction allowed under IRC section 172 for that year.

Q: Why did my carryforward shrink?
A: Because the federal-deduction limit reduced the New York deduction (here by $593,332), conforming the New York amount to the federal one.

Q: Does the limitation force gain/loss adjustments when I later sell assets?
A: No. When the deduction is limited by section 208.9(f)(3), no adjustment under section 208.9(a)(12) or (b)(11) is required, and the other adjustments are unaffected.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.9(f) (New York net operating loss deduction)
- Tax Law section 208.9(f)(1) (computation of the New York net operating loss for a loss year)
- Tax Law section 208.9(f)(3) (New York NOL deduction limited to the federal NOL deduction allowed under IRC section 172)
- IRC section 172 (federal net operating loss deduction)
- 20 NYCRR 3-8.2 (net operating loss deduction regulation)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a94_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (1) C
Corporation Tax
January 19, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C930921A

On September 21, 1993, a Petition for Advisory Opinion was received from Jusco (U.S.A.),
Inc., 175 Beal Street, Hingham, Massachusetts 02043.
The issues raised by Petitioner, Jusco (U.S.A.), Inc., are (1) whether the New York net
operating loss is limited to the amount of the Federal net operating loss deduction pursuant to section
208.9(f) of the Tax Law and section 3-8.2 of the Business Corporation Franchise Tax Regulations
(hereinafter "Regulations"), (2) whether there is an inconsistency between section 208.9(f)(1) of the
Tax Law and section 208.9(f)(3) of the Tax Law and (3) whether there is an undue burden placed
on a taxpayer by the section 208.9(f)(3) of the Tax Law net operating loss limitation when computing
the adjustment to taxable gain or loss under section 208.9(a)(12) or (b)(ll) of the Tax Law upon
subsequent disposal of assets.
Petitioner was the subject of an audit for the periods ended 1/28/89 and 10/28/89. The audit
resulted in a $593,332 reduction in the net operating loss carryforward from the period ended
1/28/89, utilized in the period ended 10/28/89. This adjustment, which resulted in additional
franchise tax and MCTD tax of $7309, was made pursuant to the limitation imposed by section
208.9(f)(3) of the Tax Law as follows:
Year ended 1/28/89
Federal taxable income before NOL

$ (355,998)

Additions:
(a) State and local taxes
(b) Federal ACRS deduction

4,900
612,569

Subtractions:
(c) NY depreciation
NY loss reported for period ended
1/28/89 and carried to period
ended 10/28/89

(1,210,801)

$ (949,330)
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The disallowance of the statutory additions and subtractions (a), (b) and (c) resulted in the net
adjustment of $593,332.
The laws of New York State are presumed to be constitutional by the Commissioner
of Taxation and Finance. There is no jurisdiction at the administrative level to declare such
laws unconstitutional; therefore, it must be presumed that the relevant sections
TP-9 (9/88)

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of the law are constitutional to the extent that they relate to the imposition of the tax liability on
Petitioner.
Section 208.9(f) of the Tax Law states, in pertinent part, that:
A net operating loss deduction shall be allowed which shall be presumably the same
as the net operating loss deduction allowed under section one hundred seventy-two
of the internal revenue code, or which would have been allowed if the taxpayer had
not made an election under subchapter s of chapter one of the internal revenue code,
except that in every instance where such deduction is allowed under this article:
(1) any net operating loss included in determining such deduction shall be
adjusted to reflect the inclusions and exclusions from entire net income required by
paragraphs (a), (b) and (g) hereof,
(2) such deduction shall not include any net operating loss sustained during
any taxable year beginning prior to January first, nineteen hundred sixty-one, or
during any taxable year in which the taxpayer was not subject to the tax imposed by
this article,
...
(3) such deduction shall not exceed the deduction for the taxable year allowed
under section one hundred seventy-two of the internal revenue code, or the deduction
for the taxable year which would have been allowed if the taxpayer had not made an
election under subchapter s of chapter one of the internal revenue code,
...
(5) the net operating loss deduction allowed under section one hundred
seventy-two of the internal revenue code shall for purposes of this paragraph be
determined as if the taxpayer had elected under such section to relinquish the entire
carryback period with respect to net operating losses, except with respect to the first
ten thousand dollars of each of such losses, sustained during taxable years ending
after June thirtieth, nineteen hundred eighty-nine.
Section 3-8.2 of the Regulations states:
(a) The net operating loss deduction allowed under article 9-A is presumably
the same as that which is allowed for Federal income tax purposes, subject to the
three limitations explained in subdivisions (b), (c) and (d) of this section.
(b) The first limitation of the net operating loss deduction for purposes of
article 9-A is that no deduction is allowed for a loss sustained during any taxable year
beginning prior to January 1, 1961, or sustained during any year in which the
corporation sustaining the loss was not subject to tax under article 9-A.

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...
(c) The second limitation on the net operating loss deduction for purposes of
article 9-A is that any net operating loss which is carried back or forward for Federal
tax purposes must be adjusted to reflect the additions and subtractions required by
sections 3-2.3 and 3-2.4 of this Part.
...
(d) The third limitation on the net operating loss deduction for purposes of
article 9-A is that in any year, it may not exceed the deduction allowable for that year
for Federal income tax purposes under section 172 of the Internal Revenue Code, or
the deduction which would have been allowable if the taxpayer had not made an
election under subchapter S, adjusted to exclude any loss or portion thereof arising
from any taxable year in which the corporation sustaining the loss was not subject to
tax under article 9-A (see subdivision (b) of this section and section 3-8.1(b) of this
Subpart) ....
In Matter of Royal Indem. Co. v Tax Appeals Tribunal, (1989, 3d Dept) 148 AD2d 845, affd
75 NY2d 75, the court held that in the calculation of a franchise tax assessment, New York State net
operating loss deductions are limited to those amounts that are Federally allowable, that is, allowed
to be taken on the Federal tax return for the corresponding year; thus, the Tax Appeals Tribunal
properly sustained the administrative determination that the insurance company could not carry
forward its 1974 and 1975 net operating losses as deductions on its 1976 and 1977 and New York
State franchise tax returns in amounts which exceeded those it had deducted on its Federal tax
returns. See also, Matter of American Employers' Ins. Co. v State Tax Commn., 114 AD2d 736;
Matter of Eveready Ins. Co. v New York State Tax Commn., 129 AD2d 958, iv denied 70 NY2d
604; Telmar Communications Corp. v Procaccino, 48 AD2d 189; Matter of Lehigh Valley Industries,
Inc., Tax Appeals Tribunal, May 5, 1988.
Further, the source year of the net operating loss deducted on the New York State return must
be the same as the net operating loss deducted on the Federal return (Matter of Lehigh Valley
Industries, Inc., supra.). See also, Arista Records, Inc., Adv Op Comm T & F, August 14, 1990,
TSB-A-90(15)C.
Section 3-8.5 of the Regulations provides:
When the net operating losses of two or more years, or the portions of net operating
losses of two or more years, are carried back or carried forward to be deducted from
the income of one particular taxable year, the [Commissioner of Taxation and
Finance] requires that an aggregate method of deducting the losses be used. The
taxpayer must compute the aggregate of the Federal net operating losses to be carried
to the particular taxable year, and, also, compute the aggregate of the net operating
losses under article 9-A for such year.

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After computing the two aggregate figures, whichever of the two (Federal or State)
is smaller is the aggregate net operating loss which is allowable as a carry back or
carry forward to the particular taxable year. The limitations described in subdivisions
(bi, (c) and (d) of section 3-8.2 of this Subpart apply in deducting the aggregate of
losses.
Accordingly, with respect to Issue "1", when Petitioner determines the amount of the net
operating loss deduction allowable for a taxable year under section 208.9(f) of the Tax Law, the three
limitations must be applied. First, any net operating loss which is carried back or forward for Federal
tax purposes must be adjusted reflect the additions and subtractions required by section 208.9 of the
Tax Law. Second, the loss must be sustained during a year that the corporation sustaining the loss
was subject to tax under Article 9-A of the Tax Law. Third the net operating loss deduction
allowable under section 208.9 of the Tax Law for any year, may not exceed the deduction allowable
for that year for Federal income tax purposes under section 172 of the IRC.
With respect to Issue "2", there is no inconsistency between sections 208.9(f)(1) and
208.9(f)(3) of the Tax Law. A net operating loss deduction is the amount of net operating loss or
losses from one or more years that are carried back or carried forward to a particular income year.
A net operating loss is the loss sustained in a particular taxable year due to a taxpayer's deductions
exceeding its receipts. Before a taxpayer can determine the amount of a net operating loss deduction,
the taxpayer must first compute the amount of the New York State net operating loss for a particular
taxable year. The New York State net operating loss for a particular taxable year is computed by
adjusting the net operating loss for such taxable year which is carried back or forward for Federal
income tax purposes by the additions and subtractions contained in section 208.9(a), (bi and (gl of
the Tax Law.
To determine the amount of the New York State net operating loss deduction, the taxpayer
may only include a New York State net operating loss (as determined above) from a taxable year the
taxpayer was subject to tax under article 9-A of the Tax Law. In addition, the amount of the net
operating loss deduction may not exceed the amount of the deduction for the taxable year allowed
under section 172 of the IRC, or the deduction for the taxable year which would have been allowed
if the taxpayer had not made an election under Subchapter S of Chapter one of the IRC. Where the
New York State net operating loss for a particular taxable year exceeds the amount of such loss that
is allowed to be carried back or forward in the net operating loss deduction, the excess may be
included in the net operating loss deduction for another taxable year if there is, also, an excess
amount of loss for Federal income tax purposes for such loss year and such excess is included in the
net operating loss deduction for such other taxable year for Federal income tax purposes and the
limitations described in section 208.9(f)(1), (2) and (3) of the Tax Law and section 3-8.2(a), (b), (c)
and (d) of the Regulations are met.
Accordingly, for purposes of computing the net operating loss deduction pursuant to section
208.9(f) of the Tax Law, section 208.9(f)(1) explains how to compute the amount of New York State
net operating loss for the loss year, and section 208.9(f)(3) explains that the amount that can be

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carried back or carried forward as the New York State net operating loss deduction in an income year
is limited to the amount of net operating loss deduction allowed for Federal income purposes under
section 172 of the IRC for that income year.
With respect to Issue "3", where a taxpayer's net operating loss deduction for a taxable year
is limited by section 208.9(f)(3) of the Tax Law, no adjustment to taxable gain or loss under section
208.9(a)(12) or (b)(ll) of the Tax Law is required upon subsequent disposal of assets. The
adjustments required to be made pursuant to section 208.9(a), (b) and (g) of the Tax Law are not
affected by a net operating loss deduction allowed pursuant to section 208.9(f) of the Tax Law.
Accordingly, there is no undue burden placed on the taxpayer by the limitation contained in section
208.9(f)(3) of the Tax Law.

DATED: January 19, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.