NOL reform makes planning for future even more important

By Bari Faye Siegel

On paper, the reduction in the top corporate income tax rate to 21 percent from 35 percent, as specified in the Tax Cuts and Jobs Act of 2017 looks like it could be a financial windfall for eligible businesses.

However, with questions looming from revised net operating loss (NOL) carryback/carry-forward guidelines (and unclear Section 199A Qualified Business Income deduction eligibility), tax advisors are now saying top earners may not feel the full financial benefits of the tax rate decrease.

Karl A. Neulinger, director at Friedman LLP, said the new business tax codes have some good, bad and ugly aspects. He said the best course for businesses is to “consult their tax advisor before the end of the year in order to take advantage of the positive changes in the business tax code reforms.”

The TCJA puts a new emphasis on time and timing as it relates to obtaining financial advice from tax advisors and how to manage overall planning and filing strategies going forward. Taxpayers must have a clear understanding of the past and present and be able to take a crystal-ball view into the future. But, said Neulinger, “you can’t go it alone.”

Prior to enactment of the TCJA, here’s how NOLs worked: When a taxpayer’s corporate deductions were more than the company’s gross income, the business could cover the discrepancy by “carrying forward” losses up to 20 years. Also, losses could be “carried back” for up to two years. Both options allowed companies to make full use of deductions and offset taxable income.

“Under the TCJA, NOL deductions are a whole new ball game,” said Brian Kristiansen, partner at Friedman LLP.

Businesses now have unlimited carry-forward ability with current-year NOL limitations. Carrybacks will be no longer permitted. Another change: Only 80 percent of a corporation’s taxable income can be offset with NOLs, Neulinger said.

In years past, NOL laws have changed and limitations were placed and removed on the program. However, the latest amendments, under the TCJA, are part of the largest tax reform in more than 30 years.

“We have to look at every aspect of a company’s windfall events and potential future losses,” said Kristiansen. “If you know you will have a major taxable income event in the future, we may have to use other parts of the new tax reform to accelerate expenses, so you can match the losses with the income when you have it.”

Brian Kristiansen, partner, Friedman LLP.

Brian Kristiansen, partner, Friedman LLP.

Assume in Year One, Company A incurs a loss of $20,000.  In Year Two, Company A has taxable income of $10,000.  Under prior law, Company A was able to utilize all $10,000 NOL carryforward in the second year and pay nothing in tax.  Under current law, Company A can now only utilize $8,000 NOL carryforward, and pay tax on $2,000.  Therefore, a cash-strapped company may still find itself with a tax liability.

Additionally, there are several other nuanced issues to consider when dealing with NOL laws. It’s incumbent upon companies to meet with tax professionals early to determine how the new NOL guidelines and TCJA reforms them.

“It is our job to assist our clients in understanding their options and optimizing the positives and decreasing impact of the negative aspects of the 2017 tax reforms,” Kristiansen said. “In the past the NOLs could go back and forward, now with the ability to go only forward, it’s more important than ever to plan for the future now.”