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Net Operating Loss Deduction Impacted by Tax Cuts and Jobs Act

Net Operating Loss Deduction Impacted by Tax Cuts and Jobs Act

The Tax Cuts and Jobs Acts (“TCJA”) brought extensive changes to the U.S. tax landscape and includes changes to the ability of taxpayers to utilize net operating losses generated after January 1, 2018.

Current law

Under current law, section 172 allows taxpayers to carryback a net operating loss (“NOL”) for two years and carryforward the NOL for twenty years to reduce taxable income. An NOL is the remainder of the taxpayer’s business deductions over its gross income. Section 172 allows for special provisions changing the carryback period for specific types of losses or losses arising in particular years. Included in these special provisions is section 172(f), which allows a 10-year carryback of losses arising from specified liabilities. The alternative minimum tax rules do not allow a taxpayer’s net operating loss deduction to reduce the taxpayer’s alternative minimum taxable income by more than 90%.

New Law

The TCJA allows for an indefinite carryforward of NOLs and revokes all carrybacks for losses incurred in tax years beginning on or after January 1, 2018. The new legislation would only allow for a special two-year carryback for certain losses incurred in the trade or business of farming. For losses arising in tax years beginning on or after January 1, 2018, the law limits the amount of NOLs that a taxpayer may use to reduce their taxable income to 80% of taxable income. Moreover, it revokes Section 172(f), the special rule allowing a 10-year carryback of specified liability losses. The taxpayer will have to differentiate between pre- and post-2018 NOLs when utilizing them in future years, and pre-2018 NOLs are still 100% utilizable to reduce taxable income.

Author: Shawn Henderson, CPA | shenderson@withum.com

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