Treasury Regulations · 26 CFR

§ 1.57-4. Limitation on amounts treated as items of tax preference for taxable years beginning before January 1, 1976.

In effect eCFR current as of October 15, 2026

Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).

Regulation under 26 U.S.C. § 57

Cite as 26 CFR § 1.57-4

At a glance

Read from the text and its source citation. Not part of the regulation.

Status: In the current eCFR
Issued: September 12, 1978 by T.D. 7564
Last amended: April 28, 1987 by T.D. 8138
Issued under: 26 U.S.C. § 57
Length: 2,372 words · about 10 min to read
Cross-references: cites 5 Code sections and 1 regulation; cited by 1

¶(a) In general. If in any taxable year beginning before January 1, 1976, a taxpayer has deductions in excess of gross income and all or a part of any item of tax preference described in § 1.57-1 results in no tax benefit due to modifications required under section 172(c) or section 172(b)(2) in computing the amount of the net operating loss or the net operating loss to be carried to a succeeding taxable year, then, for purposes of section 56(a)(1), the sum of the items of tax preference determined under section 57(a) (and § 1.57-1) is to be limited as provided in paragraph (b) of this section.

¶(b) Limitation. The sum of the items of tax preference, for purposes of section 56(a)(1) and § 1.56A-1(a), is limited to an amount determined under subparagraphs (1) and (2) of this paragraph.

¶(1) Loss year. If the taxpayer has no taxable income for the taxable year without regard to the net operating loss deduction, the amount of the limitation is equal to—

¶(i) In cases where the taxpayer does not have a net operating loss for the taxable year, the amount of the recomputed income (as defined in paragraph (c) of this section) or

¶(ii) In cases where the taxpayer has a net operating loss for the taxable year, the amount of the net operating loss (expressed as a positive amount) increased by the recomputed income or decreased by the recomputed loss for the taxable year (as defined in paragraph (c) of this section,

plus the amount of the taxpayer's stock option item of tax preference (as described in § 1.57-1(f)).

¶(2) Loss carryover and carryback years. Except in cases to which subparagraph (1)(ii) of this paragraph applies, if, in any taxable year to which a net operating loss is carried, a capital gains deduction is disallowed under section 172(b)(2) in computing the amount of such net operating loss which may be carried to succeeding taxable years, the amount of the limitation is equal to the amount, if any, by which the sum of the items of tax preference (computed with regard to subparagraph (1)(i) of this paragraph) exceeds the lesser of—

¶(i) The amount by which such loss is reduced because of a disallowance of the capital gains deduction in such taxable year, or

¶(ii) The capital gains deduction.

The amount determined pursuant to the preceding sentence shall be increased by the amount, if any, that such reduction is attributable to that portion of such a net operating loss described in section 56(b)(1)(B) and § 1.56A-2(a)(2) (relating to excess tax preferences).

¶(c) Recomputed income or loss. For purposes of this section, the phrase “recomputed income or loss” means the taxable income or net operating loss for the taxable year computed without regard to the amounts described in § 1.57-1 except paragraph (i)(2) of that section (relating to corporate capital gains) and without regard to the net operating loss deduction. For this purpose, the reference to the amounts described in § 1.57-1 is a reference to that portion of the deduction allowable in computing taxable income under the appropriate section equal to the amount which is determined in each paragraph of § 1.57-1. For example, the amount described in § 1.57-1(h) (relating to excess of percentage depletion over basis) is that portion of the deduction allowable for depletion under section 611 which is equal to the amount determined under § 1.57-1(h). For purposes of this paragraph, the amount described in § 1.57-1(i)(1) (relating to capital gains) is to be considered as the amount of the deduction allowable for the taxable year under section 1202.

¶(d) Determination of preferences reduced. When, pursuant to paragraph (b)(1) of this section, the sum of the items of tax preference (determined without regard to this section) are reduced, such reduction is first considered to be from the capital gains item of tax preference (described in § 1.57-1(i)(1)) and each item of tax preference relating to a deduction disallowed in computing the net operating loss pursuant to section 172(d), pro rata. The balance of the reduction, if any, is considered to be from the remaining items of tax preference, pro rata. For purposes of this subparagraph, deductions not attributable to the taxpayer's trade or business which do not relate to items of tax preference are considered as being applied in reducing gross income not derived from such trade or business before such deductions which do relate to items of tax preferences.

¶(e) Examples. The principles of this section may be illustrated by the following examples in each of which the deduction for the personal exemption is disregarded and the taxpayer is an individual who is a calendar year taxpayer.

¶Example 1.

The taxpayer has the following items of income and deduction for 1970:

Gross income (all business income)	$120,000
Deductions:
Nonbusiness deductions	30,000
Items of tax preference (excess accelerated depreciation on real property held in taxpayer's business)	80,000
Other business deductions	50,000

Based on the above figures, the taxpayer has a net operating loss of $10,000 (business deductions of $130,000 less business income of $120,000, the nonbusiness deductions having been disallowed by reason of section 172(d)(4)). The limitation on the amount treated as items of tax preference is computed as follows:

Tax preferences			$80,000
Net operating loss		$10,000
Recomputed income or loss:
Gross income	$120,000
Deductions other than tax preference items	80,000
Recomputed income		40,000
Sum of net operating loss and recomputed income		50,000
Stock options preference		0
Limitation		50,000

Thus, the minimum tax computed under section 56(a) would be 10 percent of $20,000 (items of tax preference of $50,000 less the minimum tax exemption of $30,000), $1,000 of which would be deferred tax liability pursuant to section 56(b).

¶Example 2.

Assume the same facts as in example 1 except that the other business deductions are $130,000, resulting in a net operating loss of $90,000. The limitation on the amount treated as items of tax preference is computed as follows:

Tax preferences			$80,000
Net operating loss		$90,000
Recomputed income or loss:
Gross income	$120,000
Deductions other than tax preference items	160,000
	(40,000)
Disallowance of nonbusiness deductions under sec. 172(d)	30,000
Recomputed loss		10,000
Net operating loss less recomputed loss		80,000
Stock options preference		0
Limitation			80,000

Thus, the minimum tax computed under section 56(a) would be 10 percent of $50,000 (items of tax preference of $80,000 less the minimum tax exemption of $30,000), all of which will be deferred tax liability pursuant to section 56(b).

¶Example 3.

The taxpayer has the following items of income and deduction for 1970:

Gross income (all from business):
Ordinary		$50,000
Net section 1201 gains		120,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution control facilities	$45,000
Capital gains deduction	60,000	105,000
Other business deductions		75,000

In addition, the taxpayer has a $55,000 item of tax preference resulting from qualified stock options. Based on the above figures, the taxpayer has no taxable income and no net operating loss as the capital gains deduction is disallowed in determining the net operating loss pursuant to section 172(d). The limitation on the amount treated as items of tax preference is computed as follows:

Tax preferences			$160,000
Net operating loss		0
Recomputed income or loss:
Gross income	$170,000
Deductions other than tax preference items	75,000
Recomputed income		$95,000
Plus: Stock options preference		55,000
Limitation			150,000

Thus, the minimum tax computed under section 56 would be 10 percent of $120,000 (items of tax preference of $150,000 less the minimum tax exemption of $30,000).

¶Example 4.

Assume the same facts as in example (3) except that the taxpayer has a net operating loss carryover from 1969 of $80,000. The taxpayer has $160,000 of tax preferences which are limited to $150,000 pursuant to § 1.57-4(b)(1). In order to determine the amount of the 1969 net operating loss which remains as a carryover to 1971, the 1970 taxable income is redetermined in accordance with section 172(b)(2) and the regulations thereunder, as follows:

Gross income—1970	$170,000
Deductions:
Capital gains deduction disallowed business deductions	$120,000	120,000
Taxable income for section 172(b)(2)		50,000

Thus, the 1969 net operating loss which remains as a carryover to 1971 is $30,000. Pursuant to paragraph (b)(2) of this section, the limitation on the amount treated as items of tax preference is computed as follows:

Items of tax preference computed with regard to § 1.57-4(b)(1) (per example (3))		$150,000
Less: Lesser of capital gains deduction ($60,000) or amount of reduction in carryover due to its disallowance ($50,000)		50,000
Limitation		100,000

Thus, the minimum tax computed under section 56 would be 10 percent of $70,000 (items of tax preference of $100,000 less the minimum tax exemption of $30,000).

¶Example 5.

The taxpayer has the following items of income and deduction for the taxable year 1970 without regard to any net operating loss deduction:

Gross income (all from business):
Ordinary	$50,000
Net section 1201 gain	40,000
		$90,000
Deductions:
Capital gains deduction	20,000
Medical expenses ($4,100 actually paid but allowable only to the extent in excess of 3 percent of adjusted gross income of $70,000)	2,000
Other itemized deductions	40,000
		62,000
Taxable income (before net operating loss deduction)		28,000

In addition, the taxpayer has an item of tax preference of $35,000 resulting from qualified stock options. In 1973, the taxpayer has a net operating loss of $60,000 (no portion of which is attributable to excess tax preferences pursuant to § 1.56A-2) which is carried back to 1970 resulting in no taxable income in 1970. In order to determine the amount of the 1973 net operating loss which remains as a carryover to 1971, the 1970 taxable income is redetermined, in accordance with section 172(b)(2) and the regulations thereunder, as follows:

Gross income		$90,000
Deductions:
Capital gains deduction disallowed
Medical expenses ($4,100 actually paid but allowable only to the extent in excess of 3 percent of adjusted gross income of $90,000)	$1,400
Other itemized deductions	40,000
		$41,400
Taxable income for section 172(b)(2)		48,600

The limitation on the amount treated as items of tax preference is computed as follows:

Items of tax preference:
Capital gains		$20,000
Stock options		35,000
		55,000
Less:
Lesser of capital gains deduction ($20,000) or amount of reduction in carryover due to its disallowance ($20,600)		(20,000)
Limitation		35,000

Thus, the minimum tax for 1970 under section 56 would be 10 percent of $5,000 (items of tax preference of $35,000 less the minimum tax exemption of $30,000).

¶Example 6.

Assume the same facts as in example (5) except that the 1973 net operating loss was $45,000. In this case, the $20,600 increase in the 1970 taxable income as redetermined, results in a decrease of $17,000 (i.e., the remaining 1973 net operating loss after an initial decrease of $28,000 resulting from the 1970 taxable income before redetermination). The limitation on the amount treated as items of tax preference is computed as follows:

Items of tax preference computed without regard to this section		$55,000
Less: Lesser of capital gains deduction ($20,000) or amount of reduction in carryover due to its disallowance ($17,000)		(17,000)
Limitation		38,000

Thus, the minimum tax for 1970 under section 56 would be 10 percent of $8,000 (items of tax preference of $38,000 less the minimum tax exemption of $30,000).

¶Example 7.

The taxpayer has the following items of income and deduction for 1973 without regard to any net operating loss deduction:

Gross income (all from business):
Ordinary	$100,000
Net section 1201 gains	120,000
		$220,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution control facilities	45,000
Capital gains deduction	60,000
	105,000
Other business deductions	75,000
		$180,000
Taxable income (before net operating loss deduction)		40,000

In 1972, the taxpayer had a net operating loss of $70,000 which is carried forward to 1973; $20,000 of this net operating loss is attributable to excess tax preferences. In order to determine the amount of the 1972 net operating loss which remains as a carryover to 1974, the 1973 taxable income is redetermined, in accordance with section 172(b)(2) and the regulations thereunder, as follows:

Gross income		$220,000
Deductions:
Capital gains deduction		Disallowed
Business deductions		120,000
Taxable income per section 172(b)(2)		100,000

In this case, the $60,000 increase in the 1972 taxable income as redetermined and the $30,000 decrease in the amount of the 1973 net operating loss remaining as a carryover to 1974 (i.e., the remaining 1972 net operating loss after an initial decrease of $40,000 resulting from the 1973 taxable income before redetermination) is entirely attributable to the disallowance of the capital gains deduction. The limitation on the amount treated as items of tax preference is computed as follows:

Items of tax preference computed without regard to this section:
Capital gains		$60,000
Excess amortization of certified pollution control facilities		45,000
		105,000
Less: Lesser of capital gains deduction (60,000) or amount of reduction in carryover due to its disallowance ($30,000)		(30,000)
		75,000
Plus: Amount of reduction of carryover (due to disallowance of capital gains deduction) attributable to excess tax preferences		20,000
Limitation		95,000

[T.D. 7564, 43 FR 40476, Sept. 12, 1978, as amended by T.D. 8138, 52 FR 15309, Apr. 28, 1987]

Cross-references

Computed from the citations in the text of 26 CFR.

Code sections it cites

Regulations it cites

§ 1.57-1 Items of tax preference defined.

Cited by 1 other regulation

§ 1.58-7 Tax preferences attributable to foreign sources; preferences other than capital gains and stock options.

Amendment history

From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.

April 28, 1987Amended by T.D. 8138 (52 FR 15309)
September 12, 1978Issued by T.D. 7564 (43 FR 40476)

Where it sits in 26 CFR

Nearby sections

§ 1.57-0 Scope.
§ 1.57-1 Items of tax preference defined.
§ 1.57-4 Limitation on amounts treated as items of tax preference for taxable years beginning before January 1, 1976.
§ 1.57-5 Records to be kept.
§ 1.58-2 General rules for conduit entities; partnerships and partners.
§ 1.58-3 Estates and trusts.
§ 1.58-3T Treatment of non-alternative tax itemized deductions by trusts and estates and their beneficiaries in taxable years beginning after December 31, 1982 (temporary).