Section 40-18-15.2

Net operating loss.

Individuals may calculate a net operating loss from a trade or business and apply the net operating loss against prior taxable income or future taxable income pursuant to this section.

(1) For purposes of this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income. The excess shall be computed with the modifications specified in subdivision (5).

(2) A net operating loss may be carried back to each of the two taxable years preceding the taxable year of the loss. A net operating loss carryover may be carried to each of the 15 years following the taxable year of the loss.

(3) The entire amount of the net operating loss for any taxable year (hereinafter referred to as the "loss year") shall be carried to the earliest of the taxable years to which, by reason of subdivision (2) that loss may be carried. The portion of the loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of the loss over the sum of the taxable income for each of the prior taxable years to which the loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be computed:

a. With the modifications specified in subdivision (5)b. and d.

b. By determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter, and the taxable income so computed shall not be considered to be less than zero.

(4) Any taxpayer entitled to a carryback period under subdivision (2) may elect to relinquish the entire carryback period in one of two ways. An election shall be made in a manner prescribed by the Department of Revenue, and shall be made by the due date of the loss year return, including extensions, for which the election is to be in effect. If no election is made by the due date of the loss year, including return extensions, then the filing of the subsequent year's return by the due date, including extensions, and claiming the loss thereon shall be deemed to be the taxpayer's election to forego the entire carryback period. An election, once made for any taxable year, shall be irrevocable for that taxable year.

(5) The modifications referred to in this subdivision are as follows:

a. No net operating loss deduction shall be allowed.

b. No deduction shall be allowed under Sections 40-18-19(a) (8) and (a)(9) and 40-18-19(b), relating to personal exemptions and credit for dependents.

c. The deductions allowable by this chapter which are not attributable to a taxpayer's trade or business, including the federal individual income tax deduction, shall be allowed only to the extent of the amount of the gross income not derived from a trade or business. For purposes of the preceding sentence:

1. Any gain or loss from the sale or other disposition of property used in the trade or business of a character which is subject to the allowance for depreciation provided in Section 40-18-15 (a) (8) and (a)(9), or real property used in the trade or business, shall be treated as attributable to the trade or business.

2. Any deduction allowable in Section 40-18-15(a) (6), relating to casualty losses, shall not be taken into account.

3. Any deduction allowed under Section 40-18-15(a) (12) to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of said 26 U.S.C. § 401(c) (1), relating to self-employed individuals, shall not be treated as attributable to the trade or business of such individual.

d. The optional standard deduction allowed under Section 40-18-15(b) shall be treated as a deduction allowed by this chapter. For purposes of subdivision (1), the deduction provided by the preceding sentence shall be in lieu of any itemized deductions of the taxpayer.

(6) In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to the other taxable year.

(7) Nonresident taxpayers shall be allowed only that portion of the net operating loss attributed to income related to Alabama. Proration of income shall be computed based upon the ratio of gross income from all sources to Alabama gross income.

(Act 98-502, §1.)