The Tax Cuts and Jobs Act places limits on the use of Net Operating Losses (NOL) for most businesses.

Prior Law

Through December 31, 2017

Prior to the new law, most business NOL’s were allowed a two-year carryback and 20-year carryforward.

New Law

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.

Commentary

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.

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Matt Eckelberg
I joined the firm in 1997 as an intern and since have advanced to partner. I have thorough experience in both audit and tax, and provide these services to commercial entities, individuals and profit-sharing 401(k) plans.

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