Looking Ahead: Net Operating Loss Rules under the New Tax Act

The Tax Cuts and Jobs Act (TCJA) of 2017 brings sweeping changes for many businesses. Along with a reduced corporate tax rate and the elimination of the Alternative Minimum Tax (AMT), the TCJA also includes significant revisions to net operating loss (NOL) rules. An understanding of these changes and their potential impact on your business is important for taking advantage of planning opportunities this year– and beyond.

Don’t Look Back: Carryback of Losses Disallowed

Previously, for taxable losses generated in 2017 and earlier, a corporation or tax-exempt organization with unrelated business income was permitted to carry back the loss to the prior two tax years to offset taxable income generated in those years. The entire NOL would first carry back to the earliest of the years, with any remaining NOL carried to the next earliest year. Under the TCJA, the ability to carry back an NOL to prior years is no longer available.

As losses generated in 2017 represent the last loss year to carry back to prior tax years, taxpayers with losses generated in 2017 should consider taking full advantage of the carry back.

To Infinity and Beyond: Indefinite Carryforwards

Although taxpayers are no longer permitted to carry back NOLs, most taxpayers may carry forward losses indefinitely under the TCJA. Losses generated in 2017 or prior years expire if not fully used within 20 years. Farming losses and losses generated by insurance companies remain unchanged by the TCJA (i.e., they retain the 20-year carryforward limitation).

The carryforward period for prior year losses remains 20 years. However, losses generated in 2018 and after are carried forward indefinitely. Organizations must carefully track losses separately by year to determine which losses will expire and which will not.

Organizations should also determine what impact indefinite carryforwards may have on deferred tax assets associated with NOL carryforwards. Currently, organizations who argue that loss carryforwards will expire before being fully utilized may establish valuation allowances to fully or partially offset deferred tax assets. With indefinite carryforwards, management must carefully consider its argument for maintaining a valuation allowance to offset deferred tax assets associated with NOL carryforwards.

The new carry back and carryforward rules are effective for tax years ending after December 31, 2017.

The “Minimum Tax” of the Future: The 80% Limitation

Under prior law, organizations were permitted to offset 100% of current year taxable income by a NOL carryforward, but only 90% of AMT income. For example, if an organization generates a loss of $100,000 in 2015 and has no taxable income in 2013 or 2014 (i.e., no carryback), the NOL of $100,000 carries forward to 2016. If the organization’s 2016 taxable income is $90,000, 2016 taxable income is reduced to $0 (with an additional $10,000 NOL from 2015 to carry forward to future years). However, under AMT rules, the NOL carryforward would offset only 90% of AMT income, leaving a portion of income subject to AMT.

AMT has been repealed under the TCJA; however, the NOL deduction is limited to 80% of taxable income. This new rule effectively creates a minimum tax for any year with taxable income. If applicable, organizations using NOL carryforwards to offset taxable income should plan accordingly for a current year tax liability.

As with the carryforward rules, losses generated in 2017 and prior years are “grandfathered,” meaning these losses are available to offset 100% of taxable income when utilized (even if utilized after 2017). Organizations should take care to track losses by year to ensure proper application of the limitation.

The new 80% limitation will apply to losses generated in tax years beginning after December 31, 2017.

The Future Is Here: Planning Opportunities

With these extensive changes to the NOL rules, the 80% taxable income limitation, and the varying dates of effectiveness, there are many planning opportunities for corporations and tax-exempt organizations with unrelated business income.

If you have questions about the new tax reform law, or would like more information about how it will affect your organization, contact one of our PYA executives below at (800) 270-9629.


Access additional tax reform insights here

Amy DeLong

Amy DeLong

Senior Manager

Emily Smithson

Emily Smithson


Eric Elliott

Eric Elliott


Related Posts
Are you feeling unease about the impending Tuesday, April 17 tax filing deadline? Fear not –the Internal Revenue Service (IRS) permits a taxpayer to file an extension to allow time...
Read More

The Tax Deadline Looms: Need More Time?

Businesses are increasingly reliant on technology to achieve organizational objectives. However, with the convenience and efficiency of technology come intensifying risks of data loss and theft. High-profile data breaches top...
Read More

Cybersecurity Framework “SOCs” It to Cyber Threats

PYA has released a white paper that discusses the importance of the AICPA’s cybersecurity risk management framework and System and Organization Controls for Cybersecurity in assessing the strength and effectiveness...
Read More

New PYA White Paper: Framework Offers Companies Solution for Cybersecurity Risk

Medicare cards are getting a much-needed facelift.  The Centers for Medicare & Medicaid Services has announced its intention to remove Social Security numbers from the cards in an effort to...
Read More
Medicare card scam

New Medicare Cards in the Mail—Don’t Fall Prey to Scammers

The ink on the Tax Cuts and Jobs Act (TCJA), which swept in a tidal wave of changes to federal tax rules, had been dry for only seven weeks before...
Read More

New Budget Agreement Brings Additional Tax Changes

To help you organize and prioritize important 2018 deadlines, we’ve provided this summary of due dates for various tax-related forms, payments, and other actions.  Be aware that some deadlines have...
Read More

No Excuses—New Tax Deadlines You Need to Know

In the wake of passage of the Tax Cuts and Jobs Act (TCJA) late last year, the IRS has taken one of the first critical steps to institute the law’s...
Read More

IRS Issues Updated 2018 Withholding Tables

Although the new tax reform was signed into law late 2017, the implications of that reform, now called the Tax Cuts and Jobs Act of 2017, won’t affect your 2017...
Read More

Tax Reform 2018

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop