The “Tax Cuts and Jobs Act” of 2017 brought sweeping changes to many business tax regulations, including those dealing with net operating losses (NOL). The carryforward and carryback periods for NOLs were changed by the new tax law. Losses generated in tax years beginning before December 31, 2017 kept their status – they were allowed to be carried back 2 years and carried forward up to 20 years. Losses generated in tax years beginning after December 31, 2017 cannot be carried back and will carryforward indefinitely.
The 80% limitation on the utilization of NOL carryforwards generated in years beginning after December 31, 2017 displays a significant change under the new tax law. Losses generated in tax years beginning before December 31, 2017 were previously allowed to offset 100% of taxable income, generating no tax due if the NOL was greater than taxable income. Losses generated in tax years beginning after December 31, 2017 will be limited to 80% of taxable income. Therefore, if you generated a NOL of $120,000 in 2018 and reported taxable income of $100,000 (before NOL) in 2019 you would pay tax on $20,000 in taxable income (lesser of $120,000 NOL or $100,000 x 80% = $80,000).
Due to the recent approval of the “Tax Cuts and Jobs Act” there is still clarification needed from the IRS on many aspects of the NOL regulations, among which include how 80% of taxable income is calculated in future years if there are NOL’s from pre-2017 and post-2017 applying to that year. There are also specific rules for farming losses, REITs and property and casualty insurance companies that could be discussed if they apply to your business.