Corporate Transactions — NOLs, Capital Gains, DRD, Related Parties, Controlled Groups (2025)

Corporate NOLs

Calculation & Deduction

Post-2017 NOLs: NO carryback, indefinite carryforward, limited to 80% of taxable income
Prior NOLs cannot increase current year NOL
Reported on Schedule K (Form 1120), line 29a
NOL carryforward can only reduce corporate income tax (not other taxes/penalties)
Cannot carry between C-corp and S-corp years

NOL Calculation Exclusions

When computing NOL, cannot deduct:

Any deduction for qualified income from foreign-derived intangible
Adjusted taxable income cannot go below zero
Capital losses exceeding capital gains

Special Industries

Farm corporations: 2-year carryback (can elect to waive, apply to earliest year first)
Property/casualty insurance companies: 2-year carryback, 20-year carryforward (no 80% limit)

Corporate Capital Gains & Losses

Tax Treatment

Capital gains taxed at same 21% flat rate as ordinary income (no preferential rates)
Capital losses ONLY offset capital gains (cannot offset ordinary income like individuals' $3,000)

Excess Capital Losses

Carryback 3 years (to earliest year with net capital gains first, then progressively forward)
Carryforward 5 years
Carried as short-term capital loss regardless of original character
Cannot carryback to years when corporation was an S-corp
If unused after 5-year carryforward → permanently lost

Form 1118 (Foreign Tax Credit) and Capital Loss Reporting

Capital gains/losses reported on Schedule D (Form 1120) and Form 4626 (AMT, if applicable).

Corporate Charitable Contributions

Deduction Limit

10% of taxable income (modified — excludes charitable deduction, DRD, domestic production activities deduction, NOL carryback, capital loss carryback)
Excess carries forward 5 years (no carryback)
After 5 years → permanently lost

Timing by Accounting Method

Cash method: Deduct only in year paid
Accrual method: Board authorizes donation during year + paid by filing deadline (not including extension) → can deduct in authorization year. Must attach statement with board resolution date.

Non-Cash Donations

Generally based on FMV of property donated
Inventory donations: Based on donor's cost basis (not FMV)
Non-cash donations >$500: must attach description schedule (date acquired, how acquired, cost basis)
Donations >$5,000: qualified appraisal required (EXCEPT: cash, publicly traded securities, inventory)
Vehicle donations >$500: special rules apply

OBBBA (2026+)

For tax years beginning after Dec 31, 2025: 1% floor on charitable deductions (only amount exceeding 1% of taxable income is deductible). The existing 10% limit continues to apply on top.

Dividend Received Deduction (DRD)

Deduction Percentages

Ownership in Paying Corp	DRD %
<20%	50%
20%-80%	65%
≥80% (same affiliated group)	100%

Ownership percentage excludes preferred stock. Only applies to C-corps (not LLCs, S-corps, partnerships, or individuals).

Taxable Income Calculation for DRD

Calculate using taxable income BEFORE:

DRD itself
NOL deduction
Extraordinary dividends (non-taxable portion adjustment)
Capital loss carryback to current year

Special NOL Situation

If corporation has NOL: calculate DRD at 50%/65% first. If result creates/increases NOL → full DRD allowed (not limited by taxable income).

Non-Deductible Dividends

REIT dividends
Dividends from §501/§521 exempt corporations
Common stock held <46 days (within 91-day period starting 45 days before ex-dividend date)
Preferred stock held <91 days (within 181-day period, dividend attributable to >366-day period)
Dividends where taxpayer has related offsetting position (e.g., short sale)
Savings institution/credit union deposit dividends (= interest income, no DRD)

Reporting

DRD reported on Schedule C (Form 1120) — Dividends, Inclusions, and Special Deductions.

Related Party Transactions (Corporate)

Loss Disallowance

Losses on sales/exchanges between related parties NOT deductible, even if bona fide at FMV.

Related Party Definition

Another corporation in same controlled group
Individual owning >50% of corporation's stock value (family attribution applies)
Trust where trust/grantor owns >50% of corporation's stock value
S-corp where same persons own >50% of both corporations' stock
Partnership where same persons own >50% of corp stock AND >50% of partnership capital/profits
PSC employee-owners (regardless of ownership percentage)

Family Attribution

Individual deemed to own stock owned by family: siblings (including half), spouses, ancestors, lineal descendants.

Accrual-to-Cash Related Party

Accrual-basis corporation CANNOT deduct business expenses/interest owed to cash-basis related party until:

Payment is made, AND
Related party includes amount in income

Closely-Held Corporations

Definition

NOT a personal service corporation (PSC), AND
50% of stock value owned by ≤5 individuals (including certain trusts and private foundations) during last half of tax year

Additional Limitations

Officer compensation: subject to reasonableness scrutiny
Passive activity loss rules apply
At-risk rules: similar to partnership partners
- "At risk" = cash/property contributed + borrowed amounts with personal liability or pledged property
- Pledged property: net FMV of taxpayer's equity in pledged property

Controlled Groups

Tax Implications

Only ONE $250,000 accumulated earnings credit for entire group
§179: group members treated as single taxpayer
Employees under common control treated as employed by single employer (for qualified retirement plan purposes)
Intercompany transactions subject to related party rules

Parent-Subsidiary Controlled Group

Parent owns ≥80% voting power of ≥1 other corporation
Subsidiaries can be ≥80% owned by parent or another subsidiary
Foreign corporations are NOT members
Can elect to file consolidated returns (Form 1120)

Brother-Sister Controlled Group

≤5 individuals, estates, or trusts own ≥80% of total combined voting power OR total value of each corporation
AND >50% identical ownership in each corporation (only counting same ownership portion — "effective control" test)
Focus is on individual ownership, not entity ownership

Key Connected Rules

C Corporation Formation & Taxation → See c-corporations.md
Corporate Distributions & Liquidations → See corporate-distributions-liquidations.md
§351 transfers → See c-corporations.md