Our federal return showed positive taxable income, but because the Federal Job Credit forced us to give up a wage-deduction on our federal return, New York lets us subtract that same disallowed wage amount from our New York entire net income -- which put us into a New York net operating loss for the year, even though we had none federally. Can we carry that New York-only net operating loss back to earlier tax years for a refund?

Plain-English summary

Allied Fence, Inc. reported taxable income of $2,380.35 on its federal return for the fiscal year ending January 31, 1979, but had claimed a Federal Job Credit of $6,960.91. Under I.R.C. § 280C, claiming that credit forced the company to give up a corresponding federal wage/salary deduction. Tax Law § 208.9(a)(7) allows New York taxpayers to exclude from entire net income that same portion of wages and salaries disallowed on the federal return because of the Job Credit. When Allied Fence applied that New York-specific addback, it reduced its New York entire net income enough to create a net operating loss of $2,245.82 for the year -- even though, on its federal return, the company had positive taxable income and no net operating loss at all. Allied Fence then sought a refund for prior taxable years by carrying that New York-only net operating loss back.

Tax Law § 208.9(f) governs the New York net operating loss deduction, providing that it "shall be presumably the same" as the federal net operating loss deduction allowed under I.R.C. § 172 -- with an express limit that the New York deduction "shall not exceed" what would have been allowed federally under § 172. So while § 208.9(a)(7) creates a New York-specific income exclusion that can produce a New York-only loss, § 208.9(f) separately caps how much of any resulting loss can actually be deducted (and carried back or forward) at the amount that would be allowed under the federal NOL rules.

Because Allied Fence had no federal net operating loss for the year in question -- its federal NOL deduction under I.R.C. § 172 was zero -- the Department held that no net operating loss deduction was available for New York franchise tax purposes, and therefore nothing could be carried back to prior taxable years, despite the New York-only loss the Job Credit wage addback had created.

What this means for you

A Job Credit wage addback can create a New York-only loss that isn't usable for a carryback

If a federal employment tax credit (like the historical Federal Job Credit, or similarly structured credits today) forces you to give up a wage deduction, and that addback pushes your New York entire net income into a loss even though your federal return shows positive income, don't assume that New York loss is available to carry back or forward -- Tax Law § 208.9(f) ties the New York NOL deduction to what's allowed federally.

Check your federal NOL amount before relying on a New York carryback claim

Because the New York net operating loss deduction cannot exceed the federal § 172 deduction, the threshold question for any NOL carryback claim is whether a federal net operating loss existed at all for that year -- if it didn't, no New York deduction is available regardless of New York-specific addback items.

Common questions

Q: If a federal credit forces us to reduce our federal wage deduction, and that reduction creates a loss only on our New York return, can we carry that loss back for a refund?
A: Not if you had no federal net operating loss for the same year -- Tax Law § 208.9(f) caps the New York NOL deduction at the amount allowable federally under I.R.C. § 172, so a purely New York-created loss from a credit-related addback isn't independently usable.

Q: Does this mean the Job Credit wage exclusion under § 208.9(a)(7) is useless if it doesn't create a federal-sized loss?
A: No -- it still reduces New York entire net income for the current year's computation; the limitation only kicks in when the addback is large enough to create a New York-only NET OPERATING LOSS that the taxpayer wants to carry back or forward beyond the current year.

Citations and references

Statutes and guidance:

• Tax Law § 208.9(a)(7)
• Tax Law § 208.9(f)
• I.R.C. § 172
• I.R.C. § 280C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h80_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-80(11)C
Corporation Tax
June 11, 1980

STATE OF NEW YORK
STATE TAX COMMISSION

ADVISORY OPINION

PETITION NO. C800331C

On March 31, 1980, a Petition for Advisory Opinion was received from Allied
Fence, Inc., 64 Hayes Place, Buffalo, New York 14210.
The issue raised in the petition is whether a New York net operating loss
for the fiscal year ending January 31, 1979 may be carried back to prior taxable
years in a case where no federal net operating loss exists.
For the fiscal year ended January 31, 1979, the taxpayer reported taxable
income of $2,380.35 on its federal return and claimed a Federal Job Credit of
$6,960.91. On its New York franchise tax return, the taxpayer reduced its New
York entire net income by the portion of wages and salary for which a deduction
was not allowed for federal purposes due to the use of the Federal Job Credit.
As a result of this reduction, the taxpayer had a net operating loss of
$2,245.82. The taxpayer applied for a refund for prior taxable years based upon
a net operating loss deduction carryback even though the taxpayer had no federal
net operating loss.
Section 208.9(a) of Article 9-A of the Tax Law provides that "Entire net
income shall not include... (7) that portion of wages and salaries paid or
incurred for the taxable year for which a deduction is not allowed pursuant to
the provisions of section two hundred eighty-C of the internal revenue code."
Section 208.9(f) of Article 9-A of the Tax Law provides 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 of nineteen hundred fifty-four...except that... (3)
such deduction shall not exceed the deduction for the taxable year allowable
under section one hundred seventy-two of the internal revenue code of nineteen
hundred fifty-four, or the deduction for the taxable year which would have been
allowable if the taxpayer had not made an election under subchapter s of chapter
one of the internal revenue code .... "
Thus, although section 205.9(a)(7) of the Tax Law allows a reduction of New
York entire net income by the portion of salary and wages not allowed on the
federal return due to the use of the Federal Job Credit, section 208.9(f) of the
Tax Law limits the amount of any resulting net operating loss deduction to not
more than the net operating loss deduction allowed for federal purposes.
Accordingly, since no federal net operating loss existed, no net operating
loss deduction may be carried back to prior taxable years for New York franchise
tax purposes.
DATED:

May 28, 1980

JAMES H. TULLY., COMMISSIONER

s/MICHAEL ALEXANDER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR