NOL Carryforward IRC 172(b)(3)

[frankharry]

I have a Trust with a loss of $3100 for 2022.  This triggers a suggestion after the error check, "prepare the IRC 172(b)(3), Election to Forego the Carryback Period For Net Operating Loss statement (available in Other Forms You May need)."  I assume that since my loss was greater than $3000, I can carry forward $100 to next year.  I find no such "Other Forms You May Need" area in any of the menus, by searching help, by searching these forums, or anywhere else on the internet pertaining to Turbotax Business.  Typing "NOL" in help does not return anything useful either.  

I assume it's a simple box to check somewhere.  Can I just not claim it and move on?  Thanks for any help.

[tagteam]

I would like to ask a threshold question because of the exact amount of the loss you stated.

Is the loss a result of the capital loss limitation? The loss sounds suspiciously like that figure ($3,000) plus the $100 exemption for a complex trust (total of -$3,100).

Trusts do not typically have NOLs, which are virtually always the result of trade or business deductions. 

[Mike9241]

and if that $3000 is a capital loss it is not really used.  it will be part of your capital loss carryover when doing the trust's 2023 return.  for other purposes in figuring an NOL for a trust you must add back the exemption amount. thus if the loss is $3K capital and $100 exemption there is no loss to carryback so there is no loss carryforward election to make and loss carryback for amending a prior year.

[frankharry]

You're right, it looks like the loss was limited.  The Trust had a capital loss of about $3800 from a home sale and about $1300 in income from investments.  I have normally distributed all income to the beneficiaries and so far have declared on the return that all of the income was distributed.  I paid out quite a bit of the principal as well this year.  There is no limitation in the Trust that says all or none of the income has to be distributed.  Would it make sense to declare the income distribution as lower, moving some of it to the principal, so that ultimately the income offsets the $3800 to bring the net loss under $3000?  Then it seems the full loss could be passed onto the beneficiaries.  Would this make sense?

Thank you.

[frankharry]

Sorry, I have that backwards.  I already have all income declared, so declaring less would not help the situation.  The deductions for taxes etc. negate what income there is.

[tagteam]

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@frankharry wrote:

Sorry, I have that backwards.  I already have all income declared, so declaring less would not help the situation.  The deductions for taxes etc. negate what income there is.

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Understood and you would not be able to pass a loss through to the beneficiaries until the trust terminates and files its final income tax return, regardless.

[frankharry]

Thank you for the clarification.  So let me make sure I have this right:

Say the Trust has $3800 in capital losses this year and $1300 in interest income.  Then it also has $800 in deductions that can be applied against income. 

I can use up to $3000 of the loss to offset income for this year, so that results in an income of -$1700.  Then with the $800 in deductions, gives the total adjusted income of -$2500.  I can distribute up to $500 of income ($1300 less $800 in deductions) to the beneficiaries.

It looks like it pays to not declare distributing any income to the beneficiaries in this case.  This removes any income passed to the beneficiaries to be taxed this year, and leaves a Trust income of -$2600.  If I distribute the maximum of $500, then that leaves a Trust income of -$3100.  If I want to pass this excess loss to the beneficiaries when the Trust closes, do I need to somehow reduce the claimed capital loss this year and increase the carryover to next year?  Logic would say to use enough of the loss to offset the income and then keep the rest for the future.  However, tax laws are usually not that simple.

I take it the form specified in the program, the IRC 172(b)(3) Election to Forego the Election Carryback Period for Net OperatingLoss statement no longer exists, since the IRS no longer allows NOL carryback?  Is there anything I have to fill out to indicate I want to carryover the loss to next year?  I should have another $800 or so in loss available.

Thank you for the feedback.

[tagteam]

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@frankharry wrote:

I take it the form specified in the program, the IRC 172(b)(3) Election to Forego the Election Carryback Period for Net OperatingLoss statement no longer exists, since the IRS no longer allows NOL carryback? 

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The NOL carryback is not relevant to your scenario because the trust does not have an NOL; it has a capital loss carryover. A capital loss cannot produce an NOL. 

Capital loss carryovers can be used to offset all other types of income (up to $3,000), but immediately will be used to offset capital gains.

[frankharry · Accepted solution]

To answer my original question, there is no reason for the program to bring up the NOL declaration form suggestion after the error check.  I'm not sure why this was flagged since the Trust has some income and a capital loss, but no Net Operating Loss.  The fact that I was completely unable to find the form it described generated even more confusion.

It looks like it pays for the Trust to not distribute any income in this situation, and instead use it to offset part of the Capital Loss.  The excess Capital Loss (that not cancelled by income) gets reported on line 14 of the Capital Loss Carryover Worksheet, which doesn't get printed unless you specifically request the program print out supporting forms.  Then when the Trust is closed, the carryover information needs to be gathered from previous years, and the loss credit should transfer to the beneficiaries on the final tax return.

Thanks everyone for pointing me in the right direction.