A net operating loss (“NOL”) is the excess of allowable business deductions over business income, with certain modifications. Thanks to the TCJA, a taxpayer’s ability to use an NOL to either (a) obtain a refund of taxes they paid in a prior year or (b) reduce their subsequent year tax liability is now prevented or restricted, depending upon when the NOL was generated. However, the good news is that the old rules still apply to any NOL carryforwards a taxpayer has that were created prior to the new tax law.
The following is a summary of the rules that can apply to a taxpayer’s various NOLs, depending upon when each NOL was generated.
For NOLs created prior to TCJA, the old rules still apply:
- The NOL could generally be carried back to two prior years to obtain a refund of tax paid in those prior years.
- The NOL could be carried forward 20 years.
- A regular NOL carryforward deduction can offset 100% of regular taxable income.
- An AMT NOL carryforward deduction can offset 90% of AMT taxable income.
For NOLs created in tax years ending after December 31, 2017, there are changes to the carryback and carryforward rules:
- The NOL generally cannot be carried back to prior tax years to obtain a refund of tax paid in those prior.
- The NOL can be carried forward indefinitely (and deducted on the decedent’s final income tax return if not fully utilized prior to the date of death).
Ex: A calendar-year taxpayer with a 12/31/17 year end would be allowed to carryback an NOL generated in its tax year January 1, 2017, through December 31, 2017. The carryback period would be two years.
Ex: However, a fiscal-year taxpayer with a Janaury 31, 2018, year end would not be allowed to carryback an NOL generated in its tax year February 1, 2017, through January 31, 2018.
Note: A technical correction could change the effective date of the above changes to the carryback and carryforward rules to “tax years beginning after December 31, 2017,” so that it agrees with legislative intent as reflected in the conference committee report.
For NOLs created in tax years beginning after December 31, 2017, there are changes to the NOL income offset limitation rule:
- A regular NOL carryforward deduction can only offset 80% of current year regular taxable income.
- An AMT NOL carryforward deduction can still offset 90% of current year AMT taxable income.
These new rules will obviously make the tracking of NOLs by tax year even more important. However, they will also cause computational difficulty for taxpayers who have multiple NOL carryforwards, some subject to the old rules and some subject to the new rules.
Year-end tax planning will take on even greater significance, given all of the new provisions introduced by the TCJA and their interdependence upon each other. Decisions with respect to accounting method, tax elections, asset acquisitions, depreciation methods, decisions regarding the 30% business interest limitation, etc. will all potentially impact the new excess business loss limitation and the resulting creation and amount of a taxpayer’s NOL, deferring the tax benefit of the taxpayer’s deductions and losses to future tax years.