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, except for tax years 2008 and 2009 (Read more about NOLs for 2008 and 2009
.) 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
Minnesota allows a three-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
Carryforwards: Minnesota allows a 15-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.
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 2011. In tax year 2012, Cliff carries back a $20,000 NOL , reducing his 2012 federal taxable income to zero. However, in 2011 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 2011 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 2012 and plans to carry it back to his 2009 return. Normally, he would have until October 15, 2013, to amend his 2009 return and claim a refund. But, since his refund claim in based on a NOL carryback, Jabar has until October 15, 2014 (or 45-1/2 months after December 31, 2009).
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 2011. She generated a NOL in 2011 and elected to carry this forward. She moved to Minnesota late in 2011 and was a full-year resident of Minnesota in 2012. Her 2012 federal tax return will include the 2011 NOL carryover and the benefit will flow to her Minnesota return.
Residency example 2: Theo was a Minnesota resident during 2011. He moved to California during 2012. He incurred a NOL in 2012 that he carried back to his 2011 federal return. Theo should amend his 2011 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 2011. She incurred a NOL in 2011, which she carried back to her 2009 and 2010 returns. Because she did not file Minnesota returns in 2009 or 2010, 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:
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 2012 which resulted in a NOL of $20,000. She carried the loss back to 2011 and amended both her federal and Minnesota return accordingly.
Carlotta calculates her bonus depreciation addition and future subtraction as follows:
2012 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
2013 (and future years) bonus depreciation subtraction: $800 per year (as calculated below)
- Step 1 – 2012 bonus depreciation addition: $24,000
- Step 2 – 2012 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