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.
