Could Illinois individuals separately subtract prior-year net operating losses and a pass-through Section 179 expense already deducted federally?

Plain-English summary

The married taxpayers could not separately subtract prior-year net operating losses or take a second Illinois deduction for a pass-through Section 179 expense already deducted on their federal return.

For individuals, Illinois base income began with properly computed federal adjusted gross income. Section 203 permitted only specifically authorized modifications and prohibited construing a modification to allow a double deduction unless the statute expressly said otherwise.

The taxpayers had deducted the full pass-through Section 179 expense on Line 17 of their federal Form 1040, so Illinois allowed no second subtraction. Their federal return also showed no net operating loss deduction for the claimed prior-year losses. IDOR explained that Section 207's Illinois net-loss carryover applied to taxpayers making modifications under Section 203(b), (c), or (d), not individuals governed by Section 203(a), and upheld the notice adjustments.

What this means for you

Start an individual's Illinois calculation with the deduction actually allowed in federal adjusted gross income. Do not add a separate Illinois NOL carryover or repeat a pass-through expense unless Section 203 expressly authorizes the modification.

Common questions

Q: Could the taxpayers deduct the pass-through Section 179 expense again on the Illinois return?
A: No. They had already deducted it in full on the federal return.

Q: Did Section 207 provide these individuals a separate Illinois loss carryover?
A: No. IDOR said Section 207 did not apply to individuals whose modifications were made under Section 203(a).

Citations and references

• 35 ILCS 5/203(a), (g), (h)
• 35 ILCS 5/207
• IRC § 179

Subject

Net Operating Loss And Net Operating Loss Deduction

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2011/it-11-0005.pdf

Original ruling text

IT 11-0005-GIL 03/08/2011 NET OPERATING LOSS AND NET OPERATING LOSS DEDUCTION
General Information Letter: Individuals take into account in computing their base
income the net operating loss properly allowed in computing their federal adjusted gross
income, and are not allowed any carryover not allowed on their federal returns.
March 8, 2011
Dear:
This is in response to your letter dated September 20, 2010, which has been forwarded to me for
consideration and response. The nature of your letter and the information you have provided require
that we respond with a General Information Letter, which is designed to provide general information,
is not a statement of Department policy and is not binding on the Department. See 86 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
We are responding on behalf of our client, Mr. Z and Mrs. Z, to your notice of
adjustment dated August 25, 2010. A copy of the notice is enclosed.
The notice is disallowing the losses stated on Schedule NR line 19. The taxpayers had
incurred losses on their 2007 and 2008 returns in the amount of $116,788 additionally
they had a loss of $14,199 stemming from COMPANY1, Inc. A copy of the fiscal years
2007, 2008 and 2009 Schedule K-1-P for COMPANY1, Inc., 2007 and 2008 Form NR,
and 2009 IL-1040 have been included for your review.
Line 19, Column A, of the taxpayers’ 2009 Schedule NR shows $15,000 in total “other income”
reported on line 21 of their federal return. Column B shows an amount of <$130,987>, which is
identified in an attached statement as comprised of <$14,199> in “other loss from COMPANY1” and
<$116,788> in “net operating loss from prior years.” The Schedule K-1-P issued to the taxpayers by
COMPANY1 for its taxable year ending October 31, 2009, reports <$48,840> in “other income and
expense” in Column A of line 31, and apportions <$14,199> of that amount to Illinois in Column B.
An attached schedule shows that the <$48,840> is for expenses deductible under IRC Section 179.
Schedule E of the taxpayers’ Form 1040 federal income tax return for 2009 shows that the <$48,840>
in IRC Section 179 expenses passed through to the taxpayers from COMPANY1 were deducted in
full on Line 17 of their Form 1040. Line 21 of the taxpayers’ Form 1040 reports “other income” of
$15,000, which is identified on an attached schedule as “misc. other income subject to S.E. tax” from
COMPANY2, Inc. No net operating loss deduction is shown on that line, nor is any deduction passed
through from COMPANY1.
Response
Under Section 203 of the Illinois Income Tax Act (the “IITA”; 35 ILCS 5/203), the computation of a
taxpayer's "net income" taxed by Illinois begins with the taxpayer's federal taxable income or, in the
case of an individual, adjusted gross income, as properly computed for the taxable year. Various
addition and subtraction modifications are then made, and the resulting "base income" is then
allocated and apportioned to Illinois. Section 203(h) of the IITA provides that no modification may be
made to taxable income or adjusted gross income unless expressly provided in Section 203 of the
IITA. Section 203(g) of the IITA prohibits interpreting any modification to permit a double deduction
unless the statute specifically provides otherwise.

IT 11-00005- GIL
March 8, 2011
Page 2

Prior to 1986, the IITA made no provision for carryovers of losses. Instead, taxpayers entitled to
claim a net operating loss deduction in computing their federal taxable income or adjusted gross
income took that deduction into account automatically in computing their base income. Since 1986,
however, taxpayers other than individuals have been required to add back net operating loss
deductions taken into account in computing their federal taxable income under Section 203(b)(2)(D)
(corporations) and 203(c)(2)(D) (trusts and estates). There is no similar provision in Section
203(a)(2), which provides the modifications required to be made by individuals to their adjusted gross
income. Section 207 of the IITA allows taxpayers making modifications to federal taxable income
under Section 203(b), (c) or (d) (partnerships) to carry over any negative amount of income allocated
or apportioned to Illinois after making those adjustments. This provision does not apply to individuals
whose modifications are made under Section 203(a).
Under these provisions, the taxpayers are not allowed to subtract the <$48,840> in IRC Section 179
expenses that were passed through to them from COMPANY1. These expenses were deducted in full
on Line 17 of their Form 1040, and no provision of Section 203 of the IITA permits a second
deduction. Also, no subtraction is allowed for “net operating losses” incurred in prior years.
Accordingly, the adjustments described in our notice dated August 25, 2010 are correct.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax