Prior to the Tax Cuts and Jobs Act (TCJA), Net Operating Losses (NOLs) generated allowed taxpayers to carry back the loss two years and/or carry it forward up to 20 years. In addition to the carryback and carryforward provisions, taxpayers could fully offset taxable income if not limited by the IRC section 382 limitations. However, the TCJA has provided changes to the carryback/carryforward provisions and set a new limitation on NOL utilization.
Changes to Carryback/Carryforward Provisions
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 are allowed to retain the two-year carryback provision.
New NOL Limitation
The TCJA introduced a new 80% NOL limitation starting with NOLs generated after January 1, 2018. Therefore, a taxpayer will only be able to utilize 80% of the NOL to offset taxable income, and 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.
Also, unless and until a technical correct is enacted, 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. Generally, the 80% limitation will not apply. However, they are also not eligible for the carryback provision and must carry forward indefinitely.
When calculating potential NOL amounts, C corporations are not allowed to take into account the new deduction for foreign-derived intangible income and the global intangible low-tax income under Code section 250. For pass-through business taxpayers, the new deduction under Sec 199A is not allowed in determining the NOL amount.
The impact of these changes 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 limitation, you cannot fully rely on NOL carryforwards to eliminate your federal tax liability.