Newly Enacted Net Operating Loss Deductions: Why Your Fiscal Year-End Date Matters

By Terry Dykhouse, CPA, MST – Shareholder, Doeren Mayhew

Taxpayers with business losses have historically been able to obtain tax refunds from prior years or fully offset future year’s tax liabilities based on the ability to carryback current net operating losses (NOL) to prior tax periods, or have the ability to fully carry forward business losses to future tax years.  Under the newly enacted Tax Cuts and Jobs Act of 2017, these rules have changed significantly.

What has Changed?

Under prior law, NOL were generally allowed to be carried back two years and forward 20 years.  In addition, NOL carryovers could fully offset 100 percent of a taxpayer’s regular taxable income if not otherwise limited.

Now, 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 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.

Effect on Fiscal Year Taxpayers

The effective date limiting an 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.

Whether you want to gain a better understanding of how the new NOL rules, along with other considerations, might impact your business, or if you’re a 2017/2018 fiscal year-end filer and want more insight on how to account for NOL this tax year, contact our tax advisors.

Want to reach the author? Email Terry Dykhouse or contact him at 248.244.3069.