Example. The taxpayer's income tax returns are made on the basis of the calendar year. In computing the net operating loss deduction for 1954, the taxpayer has a carryover from 1952 of $9,000, a carryover from 1953 of $6,000, a carryback from 1955 of $18,000, and a carryback from 1956 of $10,000, or an aggregate of $43,000 in carryovers and carrybacks. Thus, the net operating loss deduction for 1954, for purposes of determining the tax liability for 1954, is $43,000. However, in computing the taxable income for 1954 which is subtracted from the net operating loss for 1955 for the purpose of determining the portion of such loss which may be carried over to subsequent taxable years, the net operating loss deduction for 1954 is $15,000, that is, the aggregate of the $9,000 carryover from 1952 and the $6,000 carryover from 1953. In computing the net operating loss deduction for such purpose, the $18,000 carryback from 1955 and the $10,000 carryback from 1956 are disregarded. In computing the taxable income for 1954, however, which is subtracted from the net operating loss for 1956 for the purpose of determining the portion of such loss which may be carried over to subsequent taxable years, the net operating loss deduction for 1954 is $33,000, that is, the aggregate of the $9,000 carryover from 1952, the $6,000 carryover from 1953, and the $18,000 carryback from 1955. In computing the net operating loss deduction for such purpose, the $10,000 carryback from 1956 is disregarded.
Salary | $5,000 | |
Net long-term capital gain | 4,000 | |
Total gross income | 9,000 | |
Less: Deduction allowed by section 1202 in respect of net long-term capital gain | 2,000 | |
Adjusted gross income | 7,000 | |
Less: | ||
Deduction for personal exemption | $600 | |
Deduction for medical expense ($410 actually paid but allowable only to extent in excess of 3 percent of adjusted gross income) | 200 | |
Deduction for charitable contributions ($2,000 actually paid but allowable only to extent not in excess of 20 percent of adjusted gross income) | $1,400 | |
$2,200 | ||
Taxable income | 4,800 |
In 1955 the taxpayer undertakes the operation of a trade or business and sustains therein a net operating loss of $3,000. Under section 172(b)(2), it is determined that the entire $3,000 is a carryback to 1954. In 1956 he sustains a net operating loss of $10,000 in the operation of the business. In determining the amount of the carryover of the 1956 loss to 1957, the taxable income for 1954 as computed under this paragraph is $3,970, determined as follows:
Salary | $5,000 | |
Net long-term capital gain | 4,000 | |
Total gross income | 9,000 | |
Less: Deduction for carryback of 1955 net operating loss | 3,000 | |
Adjusted gross income | 6,000 | |
Less: | ||
Deduction for medical expense ($410 actually paid but allowable only to extent in excess of 3 percent of adjusted gross income as modified under this paragraph) | $230 | |
Deduction for charitable contributions ($2,000 actually paid but allowable only to extent not in excess of 20 percent of adjusted gross income determined with all the modifications prescribed in this paragraph other than the net operating loss carryback) | 1,800 | |
2,030 | ||
Taxable income | 3,970 |
For the calendar year 1959 the taxpayer, an individual, files a return showing taxable income of $5,700, computed as follows:
Salary | $5,000 | |
Net long-term capital gain | 4,000 | |
Total gross income | 9,000 | |
Less: Deduction allowed by section 1202 in respect of net long-term capital gain | 2,000 | |
Adjusted gross income | 7,000 | |
Less: | ||
Deduction for personal exemption | $600 | |
Standard deduction allowed by section 141 | $700 | |
$1,300 | ||
Taxable income | 5,700 |
In 1960 the taxpayer undertakes the operation of a trade or business and sustains therein a net operating loss of $4,700. In 1961 he sustains a net operating loss of $10,000 in the operation of the business. Under section 172(b)(2), it is determined that the entire amount of each loss, $4,700 and $10,000, is a carryback to 1959. In determining the amount of the carryover of the 1961 loss to 1962, the taxable income for 1959 as computed under this paragraph is $3,870, determined as follows:
Salary | $5,000 |
Net long-term capital gain | 4,000 |
Total gross income | 9,000 |
Less: Deduction for carryback of 1960 net operating loss | 4,700 |
Adjusted gross income | 4,300 |
Less: Standard deduction | 430 |
Taxable income | 3,870 |
26 C.F.R. §1.172-5