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Last Updated: 12/29/2016

Net Operating Losses (NOL)

Federal net operating losses (NOLs) arise when your allowed deductions exceed your gross income for that tax year. A NOL can be generated from business activity losses as a sole proprietor or partner in a partnership, or from rental investments and farming.
 
Within certain limits, you can shift NOLs to tax returns in previous years (“carry back”) or subsequent years (“carry forward”) to lower your income tax for those years.
 
For individuals, Minnesota has generally followed the federal rules for NOLs. There is no separate state calculation to claim a NOL carryback. Instead, you file an amended Minnesota return based on your updated federal return.
 
In 2010, Minnesota did not adopt the five-year NOL carryback provision of the federal Worker, Homeownership and Business Assistance Act of 2009. Individuals choosing this federal option are limited on the Minnesota return to a carryback period of two years preceding the loss. The unused portion of the loss is allowed to be carried forward for up to 20 years.
 

How to File a NOL

Carrybacks: Minnesota allows a two-year carry back period. Minnesota has no separate form for NOLs. If you amend your federal return to carry back a NOL (with federal Form 1040X or Form 1045), you must amend your Minnesota return using Form M1X, Amended Minnesota Income Tax return.
 
In order to claim a loss for a year that you were a part-year or nonresident of Minnesota you will have to file the amended return and recompute that year’s Schedule M1NR, Nonresidents/Part-Year Residents.
 
Carryforwards: Minnesota allows a 20-year carry forward period. If you carry forward a NOL on your federal return, it flows through to your state return without any added calculations.
 

Carryback

If a NOL is more than your taxable income for a year you carry it to, you may apply the excess NOL to the next eligible year on your federal return. However, Minnesota does not have a similar carryover provision at the state level.
 
As a result you may lose some of the tax benefit from a NOL on your state return. This can occur when your Minnesota taxable income is reduced by other adjustments on your return, as described in the example below.
 
Carryback example: Cliff had federal taxable income of $20,000 in 2014. In tax year 2015, Cliff carries back a $20,000 NOL , reducing his 2015 federal taxable income to zero. However, in 2014 Cliff had a subtraction on his Minnesota return for $5,000 of U.S. savings bond interest, so his state taxable income was only $15,000.
 
The NOL carryback of $20,000 reduces Cliff's 2014 state taxable income to a negative $5,000. There is no way to carry over that $5,000 to a different year on his Minnesota return, so Cliff does not get any state tax benefit from that portion of the original NOL.
 

Refund Claim Period for NOL Carrybacks

Normally, the statute of limitations for filing a claim for a refund is 3½ years from the due date of the return. But if the refund is due to a NOL carryback, the claim period is longer – up to 45½ months after the end of the tax year when the NOL occurred – as described in the example below. MS 290.095
 
Refund claim example: Jabar has a NOL in 2014 and plans to carry it back to his 2011 return. Normally, he would have until October 15, 2015, to amend his 2011 return and claim a refund. But, since his refund claim in based on a NOL carryback, Jabar has until October 15, 2016 (or 45-1/2 months after December 31, 2011).
 

Effects of Residency

If you have a NOL in a year that you weren’t a Minnesota resident, you may carry the loss back or forward to a year when you were a Minnesota resident, if that is how you are handling it on the federal return. See Residency examples 1 and 2 below.
 
If you’re a Minnesota resident when the NOL occurs and you carry the loss on your federal return to a year you weren’t a Minnesota resident, you will lose the tax benefit of the loss for Minnesota purposes. See Residency example 3 below.
 
If you’re a nonresident with a NOL from activities in Minnesota and you have sufficient income from another state to offset the loss on your federal return, you’ll have no loss for federal purposes, and thus no loss for Minnesota purposes. See Residency example 4 below.
 
Residency example 1: Denise was a California resident in 2015. She generated a NOL in 2015 and elected to carry this forward. She moved to Minnesota late in 2015 and was a full-year resident of Minnesota in 2016. Her 2016 federal tax return will include the 2015 NOL carryover and the benefit will flow to her Minnesota return.
 
Residency example 2: Theo was a Minnesota resident during 2015. He moved to California during 2016. He incurred a NOL in 2016 that he carried back to his 2015 federal return. Theo should amend his 2015 Minnesota return to report the changes to federal taxable income because of the NOL, and to claim the refund.
 
Residency example 3: Jade was an Iowa resident. She moved to Minnesota in 2015. She incurred a NOL in 2015, which she carried back to her 2013 and 2014 returns. Because she did not file Minnesota returns in 2013 or 2014, she receives no Minnesota benefit. Jade could elect to carry forward the losses on her federal return if she wants a Minnesota benefit.
 
Residency example 4: Claire is a resident of Iowa with the following income:
Wages                                                            $50,000
Interest income                                             $10,000
Loss from a Minnesota partnership         ($5,000)
Federal AGI                                                    $55,000
Though Claire has a loss from Minnesota activities, there is no NOL on her federal return for the year. As a result, she can’t use the loss for Minnesota purposes. Since there is no federal loss for that year, Claire isn’t allowed to carry the partnership’s loss to other years on her Minnesota return.
 

Effects on Household Income

NOL carryovers may not be used when computing household income for the state K-12 Education Credit, Child and Dependent Care Credit, and Property Tax Refund. Any NOL carryovers on your return must be added back when calculating household income for these credits.
 
Note: Since you aren’t allowed to adjust household income based on NOL carryovers, you don’t need to recalculate these credits when you carry back NOLs to a previous year.
 

Changes to Federal Adjusted Gross Income

NOL carryovers reduce federal adjusted gross income. If you carry back a NOL, you must amend the following related items on your Minnesota return (if applicable):
 
Schedule M1WFC, Working Family Credit
Schedule M1R, Subtraction for those 65 or older or disabled
Schedule M1CR, Credit for Taxes Paid to Another State
Schedule M1MT, Alternative Minimum Tax
Schedule M1NR, Nonresident/Part-Year Resident

NOLs and Bonus Depreciation

In the year you claim the bonus depreciation on your federal return, you must add back 80 percent to your Minnesota return, as you normally would. But the bonus depreciation subtraction you claim over the next five years will be reduced by the NOL amount using the worksheet in the Form M1M instruction, as shown in the example below.
 
Bonus depreciation example: Carlotta, a sole proprietor, purchased an asset for her business and claimed federal bonus depreciation of $30,000 in 2015 which resulted in a NOL of $20,000. She carried the loss back to 2014 and amended both her federal and Minnesota return accordingly.
 
Carlotta calculates her bonus depreciation addition and future subtraction as follows:
 
2015 bonus depreciation addition: $24,000 (as calculated below)
  • Step 1 – Bonus depreciation claimed on federal return: $30,000
  • Step 2 – Multiply step 1 by 0.80 for bonus depreciation addition: $24,000
2016 (and future years) bonus depreciation subtraction: $800 per year (as calculated below)
  • Step 1 – 2015 bonus depreciation addition: $24,000
  • Step 2 – 2015 NOL carryover (enter as a positive amount): $20,000
  • Step 3 – Subtract step 2 from step 1: $4,000
  • Step 4 – Multiply step 3 by 0.20 for bonus depreciation subtraction: $800