President Donald Trump has signed the Tax Reconciliation Act of 2017 (the Act) into law, and the new law including major changes to the utilization of net operating losses (NOLs) for corporate taxpayers.
Under current tax rules, a corporation can generally carry back a net operating loss (NOL) to the two preceding taxable years and carry it forward up to the twenty taxable years. Under the new rule, it eliminates the ability to carry back NOLs generated in taxable years beginning after December 31, 2017. The NOL carry forward period for new NOLs would also change from the current twenty succeeding taxable years to an indefinite period.
The second aspect is under current tax rules; a corporation can generally use the loss to offset 100 % of federal taxable income and 90% of the alternative taxable income. The new law limits the net operating loss (NOL) deduction for a given year to the lesser of the available NOL carryover or 80 percent of a taxpayer’s pre-NOL deduction taxable income (the “80-percent limitation”) with losses arising in tax years beginning after December 31, 2017.
For example, if calendar year corporation ABC has $50 million in NOLs generated through December 31, 2017 and incurs a $20 million NOL in the tax year ending Dec. 31, 2018, the applicable NOL rules would require ABC to track the 2017 and prior NOLs separately from the 2018 NOL, which is subject to the limitation. If in 2019 ABC generated $70 million in income, it would appear that the entire $50M of 2017 and prior NOL would be available. For 2018 NOL, they can only use up to $6 million given the 80% of $70 million equals $56 million.
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