Ask the Advisor – Net Operating Losses

Terry Dykhouse, CPA, MST Shareholder

Q. How will the new changes to net operating losses (NOL) affect my business’s 2017/2018 fiscal year-end?

Under new law, except for farming losses, taxpayers no longer have the ability to carryback NOL arising in a tax year ending after Dec. 31, 2017. However, most taxpayers can now carryforward NOL indefinitely. In addition, the Tax Cuts and Jobs Act limits the NOL deduction to 80 percent of taxable income. NOL arising in tax years beginning before Jan. 1, 2018, can still fully offset taxable income.

The effective date limiting the NOL deduction to 80 percent of taxable income is effective for NOL arising in tax years beginning after 2017. However, the effective date eliminating the two-year carryback period and the indefinite carryover period is effective for NOL arising in tax years ending after Dec. 31, 2017.

These dates are critical for filers who observe a 2017/2018 fiscal year-end to be aware of. For these taxpayers, if an NOL arises during this fiscal year, it may not be carried back two years since it arose in a tax year ending after 2017. However, the losses are not subject to the 80 percent taxable income limits because they did not arise in a tax year beginning after 2017.