26-51-427. Deductions — Net operating loss carryover — Definitions.

26-51-427. Deductions — Net operating loss carryover — Definitions. In addition to other deductions allowed by this chapter, there is allowed as a deduction from gross income a net operating loss carryover under the following rules: (1)(A) The net operating loss for any taxable year may be carried over to the next-succeeding taxable year and annually thereafter for a total period of three (3) years next succeeding the year of the net operating loss or until the net operating loss has been exhausted or absorbed by the taxable income of any succeeding year, whichever is earlier, if the net operating loss occurred in an income year beginning before January 1, 1987. The net operating loss deduction shall be carried forward in the order stated in this subdivision (1)(A). (B) The net operating loss for any year ending on or after the passage of the Income Tax Act of 1929, § 26-51-101 et seq., and for any succeeding taxable year before January 1, 2020, may be carried over to the next-succeeding taxable year and annually thereafter for a total period of five (5) years next succeeding the year of the net operating loss or until the net operating loss has been exhausted or absorbed by the taxable income of any succeeding year, whichever is earlier, if the net operating loss occurred in an income year beginning on or after January 1, 1987, and before January 1, 2020. The net operating loss deduction shall be carried forward in the order stated in this subdivision (1)(B). (C)(i) For net operating losses occurring in taxable years beginning on or after January 1, 2020, the net operating loss may be carried over to the next succeeding taxable year and annually thereafter for the following number of years next succeeding the tax year of the net operating loss or until the net operating loss has been exhausted or absorbed by the taxable income of a succeeding year, whichever is earlier: (a) For net operating losses occurring in the tax year beginning January 1, 2020, a total period of eight (8) years; and (b) For net operating losses occurring in tax years beginning on or after January 1, 2021, a total period of ten (10) years. (ii) The net operating loss deduction shall be carried forward in the order stated in this subdivision (1)(C). (D) As used in this section, “taxable income” or “net income” means the net income computed without benefit of the deduction for income taxes, personal exemptions, and credit for dependents. The net income of the taxable period to which the net operating loss deduction, as adjusted, is carried is the net income before the deduction of federal income taxes, personal exemption, and credit for dependents. The income taxes, exemptions, and credits described in this subdivision (1)(D) shall not be used to increase the net operating loss that may be carried to any other taxable period. (E)(i) As used in this section, “qualified medical company” means a corporation engaged in: (a) Research and development in the medical field; and (b) The manufacture and distribution of medical products, including therapeutic and diagnostic products. (ii) In the case of a qualified medical company, a net operating loss for any taxable year shall be a net operating loss carryover to each of the fifteen (15) taxable years following the taxable year of the loss. (iii) If the qualified medical company is a Subchapter S corporation, the pass-through provisions of § 26-51-409, as in effect for the taxable year of the net operating loss, are applicable. (iv) The net operating loss provisions stated in this subdivision (1)(E), which resulted from the operation of a qualified medical company, are effective for taxable years beginning on and after January 1, 1987; (2) As used in this section, “net operating loss” means the excess of allowable deductions over gross income for the taxable year, subject to the following adjustments: (A) There shall be added to gross income all nontaxable income not required by law to be reported as gross income less any expenses properly and reasonably incurred in earning nontaxable income, which expenses would otherwise be nondeductible; (B) In the case of a taxpayer other than a corporation, deductions, not including federal income taxes, not attributable to the operation of the trade or business, are eliminated from the deductions otherwise allowable for the taxable year to the extent that they exceed gross income not derived from trade or business. Personal exemptions and credit for dependents are not a deduction for the purpose of computing a net operating loss; (C) A net operating loss deduction shall not be allowed; and (D) In the case of a taxpayer other than a Subchapter C corporation, as defined in 26 U.S.C. § 1361, as in effect on January 1, 1985: (i) The amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and (ii) The deduction for long-term capital gains provided by 26 U.S.C. § 1202 [repealed], as in effect on January 1, 1985, shall not be allowed; and (3) In the case of the acquisition of assets of one (1) corporation by another corporation, the acquiring corporation shall succeed to and take into account any net operating loss carryover apportionable to Arkansas, under the Uniform Division of Income for Tax Purposes Act, § 26-51-701 et seq., that the acquired corporation could have claimed had it not been acquired, subject to the following conditions: (A) The net operating loss may not be carried forward to a taxable year that ends more than three (3) years after the taxable year in which the net operating loss occurred if the net operating loss occurred in an income year beginning before January 1, 1987; (B) The net operating loss may not be carried forward to a taxable year that ends more than five (5) years after the taxable year in which the net operating loss occurred if the net operating loss occurred in an income year beginning on or after January 1, 1987, and before January 1, 2020; (C) The net operating loss may not be carried forward to a taxable year that ends more than the number of years stated in subdivision (1)(C) of this section after the taxable year in which the net operating loss occurred if the net operating loss occurred in an income year beginning on or after January 1, 2020; and (D) The net operating loss may be claimed only when the ownership of both the acquired and acquiring corporations is substantially the same in that not less than eighty percent (80%) of the voting stock of each corporation is owned by the same person or, before the acquisition, the acquiring corporation owned at least eighty percent (80%) of the voting stock of the acquired corporation. The carryover losses are allowed only in those cases in which the assets of the corporation going out of existence earn sufficient profits apportionable to Arkansas under the Uniform Division of Income for Tax Purposes Act, § 26-51-701 et seq., in the post-merger period to absorb the carryover losses claimed by the surviving corporation.