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Changes to net operating losses under tax reform

NOLs, net operating losses, tax reformThe tax law on net operating losses (NOLs) has changed with the new Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The “old law” stated that an NOL is carried back two years and then carried forward 20 years. According to the “new law,” any net operating loss that occurs in any tax year beginning after December 31, 2017 will not be allowed for carryback but will be allowed to be carried forward indefinitely. Of course, with tax law, nothing is simple so there are some exceptions to this law and some further limitations.

Exceptions

Farming losses and certain insurance companies have exceptions to the NOL changes stated above. Farming losses are allowed a two year NOL carryback (“old law” was originally five years). This can be waived with an election made on the tax return. Insurance companies, other than life insurance companies, are allowed a two-year carryback and are limited to a 20-year carry forward. A life insurance company will follow the same rule as other corporations, which is no carryback allowed and carry the NOL forward indefinitely.

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Limitations

The new law has put in a taxable income limit when calculating allowable NOL for the current tax year. The NOL deduction for the year is limited to the lesser of:

  1. The aggregate of the NOL carryovers/carryforwards to the tax year, plus the NOL carryback to the tax year
  2. 80% of taxable income computed for the tax year without regard to the NOL deduction allowed for the tax year (90% is used for AMT calculations)

Any excess is carried back (if allowed for the type of entity) or forward. Note that since this limitation only applies to NOLs that arise after December 31, 2017, any NOL carryback or carryforward that is attributable to losses prior to January 1, 2018 are not subject to this limitation. Also, the 80% income limitation does not apply to non-life insurance companies.

Kelsey Olsen, CPA