How the Tax Reform Bill Affects Net Operating Losses

 Posted on January 10,2018 in Taxation Law

In December 2017, Congress passed a tax bill that represented the most significant reform to the U.S. tax code in the last 30 years. The Tax Cuts and Jobs Act of 2017 made a large number of sweeping changes to tax law in the United States, affecting nearly everyone in the country, from individual taxpayers to large corporations. While many of the effects of this new law are still being worked out, one change that businesses should be aware of is how net operating losses (NOLs) will be handled going forward.

NOLs, Carryback, and Carryforward

In the past, businesses that reported a net operating loss (that is, the business’s expenses were greater than its revenues) in a tax year were able to use this amount to offset taxable income in other tax years. They would be able to carry the amount back to the two preceding years and receive an immediate refund for taxes paid or carry the amount forward up to 20 years to reduce the amount of taxable income in those years. This allowed businesses to help avoid some of the consequences of taxing their income on an annual basis and effectively pay taxes on an average income over multiple years.

The Tax Cuts and Jobs Act of 2017 has eliminated carrybacks for most companies. However, NOLs may now be carried forward indefinitely, although the amount of NOLs that may be deducted is limited to 80 percent of a business’s taxable income in the year for which the deduction is being applied. These changes apply to tax years that begin after December 31, 2017.

These changes to the law will have a significant impact on many businesses that had relied on the tax refunds available by carrying back NOLs. Rather than receiving immediate refunds, these companies will now have to wait until they are able to offset NOLs against future taxable income, and the amount they will be able to deduct will be limited. Companies that are struggling to overcome losses should consult with a tax attorney to understand how to minimize the negative impact of this change to the tax laws.

Contact a San Jose Tax Lawyer

If you need help understanding how the Tax Cuts and Jobs Act of 2017 will affect your business’s tax liabilities and your eligibility for tax refunds, John D. Teter Law Offices can answer your questions and work with you to minimize your tax burden. Contact a San Jose, CA business tax attorney today at 408-866-1810.

Sources:

https://www.forbes.com/sites/greatspeculations/2017/11/10/how-senate-tax-bill-disallows-excess-business-losses-in-pass-through-entities/#776f4d302f78

https://www.bna.com/new-calculations-unrelated-b73014473901/

https://www.accountingtools.com/articles/2017/5/15/the-net-operating-loss-carryback-and-carryforward