A net operating loss (NOL) is the result when a company’s allowable deductions exceed its taxable income within a tax period. The IRS has recently passed the Tax Cuts & Jobs Act (TCJA) which also sheds some light on the tax rules for Net Operating Loss (NOL).
Prior to the TCJA, Net Operating Losses (NOLs) generated allowed taxpayers to carry back the loss two years and/or carry it forward up to 20 years, as well as fully offset taxable income if not limited by the IRC section 382 limitations.
The TCJA has eliminated the two-year carryback provision that was allowed prior to the newly enacted legislation. Under the TCJA, taxpayers will carry forward the NOL indefinitely and not be limited to a 20-year carryforward provision. However, NOLs generated from a farming loss and NOLs of insurance companies other than a life insurance company are allowed to retain the two-year carryback provision.
The TCJA also introduced a new 80% NOL limitation starting with NOLs generated after January 1, 2018 – the NOL deduction is limited to 80% of taxable income (determined without regard to the deduction), the remaining will be carried forward indefinitely. However, NOLs generated prior to January 1, 2018, are not subject to the 80% NOL limitation and retain the ability to deduct at 100%. Therefore, pre-2018 losses should be tracked separately from post-2017 losses in order to correctly compute the NOL deduction, and fiscal year taxpayers with NOLs arising in tax years beginning before December 31, 2017 will be subject to a hybrid of the new and old rules for the fiscal year end.
Table 1. Comparison Chart of NOL Rules Before and After the TCJA
|NOL Rules||Before the Tax Cuts & Jobs Act (TCJA)||After the Tax Cuts & Jobs Act (TCJA)|
|Carryback Period||2 years||N/A, except for certain farming losses|
|Carryforward Period||20 years||Indefinite, except for certain farming losses and NOLs of insurance companies other than a life insurance company|
|Deductibility||100% deductible if not limited by the IRC section 382 limitations.||80% deductible of the taxable income in any one tax period for NOLs generated after January 1, 2018|
The impact of the TCJA on NOLs makes it imperative for you to understand the timing of your income and deductions as you look for various tax planning strategies. As a result of the new legislation, you cannot fully rely on NOL carryforwards to eliminate your federal tax liability. If you have questions about how these changes affect you, please contact our tax specialists at 469-467-4660.