C Corporation. A corporation’s capital gains are taxed at the corporation’s regular tax rate. Thus the maximum federal tax rate on a corporation’s capital gain is 21 percent. A corporation may deduct capital losses only up to the amount of its capital gains. If a corporation has a net capital loss, the loss cannot be deducted in the current tax year but instead must be carried to other tax years and deducted from capital gains that occur in those years. This is the case for both federal and Minnesota tax purposes. Net Operating Loss If the taxpayer’s deductions for the year exceed gross income, the taxpayer may have a net operating loss (NOL). The NOL is used to reduce taxable income in other years. There are limits on the kinds of deductions, and the amounts, that can be used in computing an NOL. These limits are different for individuals and for corporations and for federal and Minnesota returns. For C corporations, if the NOL is attributable to business carried on both in and outside Minnesota, a computation allocating a portion of the NOL may be required on the Minnesota return. Minnesota has decoupled its tax treatment of a NOL from the federal tax treatment. Minnesota tax law must be followed in taking the NOL deduction for Minnesota income tax purposes. Significantly, in 2023 Minnesota reduced the NOL deduction from 80 percent to 70 percent for tax years beginning after December 31, 2022. In a July 2023 release the Minnesota Department of Revenue indicated that the effective date of that reduction may change to December 31, 2023 since the legislature has given the Commissioner of Revenue a letter of intent to accomplish that change in the future. Legislation signed into law on April 8, 2024, retroactively changed the effective date to reduce the Net Operating Loss (NOL) deduction limitation. The Corporate NOL deduction limitations are: • For tax years beginning after December 31, 2017, and before January 1, 2024, the NOL deduction is limited to 80% of taxable net income • For tax years beginning after December 31, 2023, the NOL deduction is limited to 70% of taxable net income Deductions for Ongoing and Start-Up Expenses Section 162 of the Internal Revenue Code allows a tax deduction for the ordinary and necessary expenses of carrying on a trade or business. While the Code is silent as to what specifically constitutes actions carrying on a trade or business, the U.S. Supreme Court, in the 1987 case of Commissioner v. Groetzinger held that they are defined as “…any activity carried on with continuity and regularity with the purpose of making a profit or income.” Without that activity and purpose, one does not have a business one has a hobby. The Tax Cuts and Jobs Act of 2017 completely eliminated the deduction for expenses associated for a hobby or other activity not carried on for profit or income. The burden of proof of showing activity in pursuit of profit is on the taxpayer except under the exception in section 183 which holds that if an activity shows a profit for three of the last five years the burden of proof shifts to the IRS to show that the activity was not in pursuit of profit .
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