Under current tax rules, a corporation can generally carry back a net operating loss (NOL) to the two preceding taxable years and carry it forward for up to 20 taxable years following the loss to offset 100 percent of federal taxable income and 90 percent of alternative taxable income.
Section 3302 of H.R. 1, introduced on Nov. 2, 2017, proposes to change the NOL rules. Section 3302 would eliminate the ability to carry back NOLs, except for carrybacks provided for under disaster relief legislation. The NOL carryforward period would change from the current 20 succeeding taxable years to an indefinite period. A similar provision in the proposed legislation introduced by the Senate would also allow for an indefinite carryforward period of NOLs incurred after Dec. 31, 2017. With the elimination of the alternative minimum tax, all NOLs would be able to offset only 90 percent of federal taxable income. The original Senate bill, however, would only limit NOLs incurred after Dec. 31, 2017, to offset 90 percent of taxable income. The Chairman’s modification to the Senate bill limits the NOL offset to 80 percent of taxable income (determined without regard to the deduction) in taxable years beginning after Dec. 31, 2023.
The new carryforward period for NOLs in the proposed legislation could result in some interesting financial statement reporting issues. Under GAAP, a loss corporation is typically required to record a deferred tax asset for the value of the NOL carryforward. A corporation may also be required to record a contra asset, a valuation allowance, to offset its deferred tax asset if the future utilization of the NOL is uncertain. One significant factor in making this determination is the limitation imposed by the current 20-year carryforward period. If the carryforward period is changed to be indefinite, companies may have to continue to record a valuation allowance on the NOLs generated prior to Dec. 31, 2017, and not on the NOLs generated after that because they have an indefinite carryforward period.
Section 3302 also contains a provision that would increase the amount of the NOL in any year the NOL went unutilized by a factor computed by the short-term tax-exempt rate plus 4 percent. Of note, the Senate bill does not include a similar provision. Taxpayers may want to think about adopting favorable accounting method changes even if they relate to differences in the timing of the deduction if it increases an NOL incurred after Dec. 31, 2017, if the legislation passes. The value of the Section 481(a) adjustment will be enhanced for taxpayers carrying the NOL forward as the multiplier will be essentially added to the Section 481(a) adjustment.
Get a free trial to Bloomberg BNA Tax & Accounting, a comprehensive tax research solution designed by tax practitioners for tax practitioners.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)