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Mark D
Mark D, Enrolled Agent
Category: Tax
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Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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I have a Federal NOL that when entered in the California ...

Customer Question

I have a Federal NOL that when entered in the California Form 540CA is offset by the California additions for the Federal NOL. I would like to deduct from California income taxes that Federal NOL.

On Schedule FTB CA (540), Ln 21c, part 1, the Federal NOL is added back. This causes the FTB Form 540 line 17 to show an adjusted income without the Federal NOL.

I am told to use the CA (540) adjustments form to subtract the Federal NOL using line 21d, part 1. This requires filling out Form FTB 3805V.

However, the first thing the Form TB 3805V asks in Part 1, section A, ln 1 is the adjusted gross income from Form 540, line 17.

This feels like the Chicken and Egg problem. The Form 540, line 17 is calculated from the results of the 3805V, but the 3805V gets its first input from Form 540, line 17.

What should I do?

I think I should enter the adjusted gross income WITH the Federal NOL subtracted for the 3805V Part 1, section A, ln 1. Is that correct?

Edit:
I asked this question days ago, but it shows up as asked in the recent couple of hours. Is this correct?
Submitted: 8 years ago.
Category: Tax
Expert:  Mark D replied 8 years ago.
Customer

The federal NOL is added back to your CA AGI because a CA NOL is a separate item that usually differs is value from the federal NOL. On form 3805V, page 3, you will have your CA NOL that has carried forward from previous years. You can use up to the amount of the modified taxable income (MTI) on the same page. Use this value on Sch CA, line 21d to subtract this from your AGI. Sch CA, line 21c is where the Federal NOL is added back. Please let me know if you have any questions.

Regards,

Mark D

Mark D and other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Reply to Mark D's Post: Thank you for the answer. This is very helpful.

I have a follow up, and maybe this example can help others reading this thread. Do the following steps do what you are describing? Thanks!


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Step #1:

Form 3805V

Part 1, Section A

Ln 1 Adjusted Income from Ln 17 Form 540 = 10K
Ln 2 CA Standard Adjustment = -7K
Ln 3 Combine Ln 1 & Ln 2 = 3K
    If Ln 3 Positive then you do not have a NOL, enter 0 and enter 0 on Ln 27
Ln 27 2007 NOL Carry-over = 0K

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Step #2:

Form 3805V

Part 2

Ln 1 Taxable Income = 3K
Enter Ln 2 to 4 as if they are all positive numbers:
Ln 2 Capital loss deduction = 0K
Ln 3 Disaster loss carryover = 0K
Ln 4 NOL carryover in Ln 1 = 20K
Ln 5 Combine Ln 1 to 4 = 23K

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Step #3:

Form 3805V

Part 3

Ln 1 MTI from Part 2, Ln 5 Available Balance = 23K

Ln 5 NOL Carryover (add all amounts) = 23K

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Step #4:

Form CA 540

Part 1, Ln 21d (subtractions) = 23K

Thus, 21d subtractions offsets the 23K Federal NOL additions in ln 21c.
Expert:  Mark D replied 8 years ago.
Customer

This appears correct as your CA NOL is limited to your MTI.

Regards,

Mark D

Customer: replied 8 years ago.
Thank you for the answer. It was quite helpful.