The Tax Cuts and Jobs Act places limits on the use of Net Operating Losses (NOL) for most businesses.
Through December 31, 2017
Prior to the new law, most business NOL’s were allowed a two-year carryback and 20-year carryforward.
Effective for tax years beginning after December 31, 2017
For years after 2017, NOL’s may only be carried forward and NOL deductions are limited to 80% of income before the NOL deduction. The NOL carryforward period is indefinite, but exceptions apply to certain industries. Farms are allowed a two-year carryback, as are property and casualty companies. In addition, property and casualty companies still have a 20-year carryforward and can claim a deduction of 100% of income.
This change has several potential impacts. The carryback provisions allowed for recovery of taxes previously paid, which provided a current cash flow benefit. Also, because of the 80% limit, corporations that become profitable will pay tax on 20% of their income in the first year they become profitable. With the 100% offset allowed under prior law, a corporation could defer paying tax for a longer period of time.