Prior to the recent tax law changes, business NOLs were eligible to be carried back 2 years or forward for the next 20 years to offset income in those years. The TCJA has eliminated the 2 year carryback period. For tax years ending after December 31, 2017, NOLs can only be carried forward, not back. Additionally, the 20 year carryforward limitation has been lifted, allowing losses to carry forward indefinitely. For NOLs generated in tax years ending December 31, 2017 and prior, they will still have a carryforward period of only 20 years. The new rules regarding carrybacks and carryforwards only apply to NOLs generated in tax years ending after December 31, 2017.
There is one exception to this new rule. Farmers are still allowed a 2 year carryback period.
Limitation on NOL Deductions
Under old tax laws, an NOL could be used to offset all of a taxpayer’s income in a following year. However, starting with NOLs generated in tax years beginning after December 31, 2017, NOL deductions are limited to 80% of your taxable income. NOLs carried over from tax years beginning before December 31, 2017 will be fully deductible against 100% of taxable income in future years.
The law lists two different effective dates for these changes to the NOL rules, one for years ending after December 31, 2017 and one for years beginning after December 31, 2017. This could be an oversight that is handled through a technical correction to the TCJA or it could stand. We expect more clarification on this as regulations are released in the coming year.
Tax Planning Considerations
Here are some things to consider if you have or expect to have an NOL:
- 2017 will be the last year to use a carryback to realize an immediate tax benefit by getting a refund of tax paid in a prior year. When carrying forward, you will need to wait a year or more to realize any tax benefit.
- Carrying back a loss doesn’t always get you the highest tax benefit. If you were in a lower income tax bracket in the prior year, the benefit would not be as high if you were using it in a year that you are in a higher tax bracket. If you are expecting higher income next year, you might get a higher tax benefit by carrying forward the loss. For example, if your NOL is $100,000 and you were in the 15% tax bracket in the carryback year, your tax benefit would be $15,000. However, if you expect to be in the 35% tax bracket next year, your tax benefit would be $35,000 for a difference of $20,000 in tax savings!
- If you have NOLs from before and after December 31, 2017, they will need to be tracked separately so that they can be applied to 100% or 80% of taxable income as warranted.
- The generation of NOLs is expected to increase as a result of the increased bonus depreciation deductions allowed. However, it could be better to save these deductions for a year when they can be used against 100% of taxable income as depreciation rather than limited to 80% of taxable income as NOLs. If you expect a business loss, consider saving the purchase of equipment for the following year, if possible.
The TCJA also added a provision that limits the business losses that are able to offset other non-business income. Any business losses not allowed due to this rule are able to be carried forward as NOLs. We will cover this new business loss limitation in next week’s Tax Act Tuesday article.
As always, tax laws are complicated. Be sure to ask your client service contact how the new rules will impact you.
Do you have a question about a specific provision in the new tax law? If so, send your question to firstname.lastname@example.org and we could feature your question in an upcoming edition of our Tax Act Tuesday blog!