Tax Reform FAQs: How are Prior NOL Carryforwards Treated?January 16, 2018
How does the 2017 Tax Cuts and Jobs Act change how net operating losses (NOLs) will be treated? Will NOLs incurred prior to 2018 be impacted?
Did you tune into our webinar last week? Don’t worry if you missed it—you can find it here- “The Impact of Tax Reform on Businesses and Individuals”. Over the next few weeks, we will be covering some frequently asked questions in the area of tax reform. This week, we tackle net operating losses (NOLs) and how carryforwards will be treated under new guidance.
First off- what is a net operating loss?
A net operating loss, better known as an NOL is a loss generated in a period when a company’s allowable tax deductions are greater than its taxable revenues.
Prior to 2018…
Generally, these NOLs
- could be carried back up to 2 years to recover past tax payments,
- can be carried forward up to 20 years, and
- could offset 100% of taxable income when carried back or forward.
So, how does tax reform change this?
After 2017 - Modification of net operating loss deduction
For NOLs arising in tax years ending after December 31, 2017, the two-year carryback provisions are repealed, except in the case of certain losses incurred in the trade or business of farming. Instead, NOLs will carry forward indefinitely.
In addition, for losses arising in tax years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the deduction).
Note that this modification is effective only for losses arising in tax years beginning after December 31, 2017. NOLs that arose in tax years prior to 2018 will not be subject to the 80%-of-taxable-income limitation. Also, the 2-year carryback and 20-year carryforward rule still applies to those old NOLs. The business will need to distinguish between the pre-2018 and post 2017 NOLs when computing the NOL deduction.
As my partner, Norman Leblanc, noted in the webinar, be sure to keep detailed records related to the NOLs until the losses are used entirely. Under this tax change, that could mean an indefinite timeframe!
Questions? Reach out to me or any member of our Tax Services Team. Download the recording of our webinar, “The Impact of Tax Reform on Businesses and Individuals”.