With PNOLs, PNOLCs, and UNOLs now a part of the New York tax landscape, one thing is clear: NOL alphabet soup is being served up to New York taxpayers. Get it while it’s hot!
Under New York’s sweeping 2014 tax reform package, the state changed the application of the net operating loss (NOL) deduction and expanded the circumstances under which affiliated corporations must file combined reports. The convergence of these major changes requires corporate taxpayers to navigate complex transition rules, which the New York Department of Taxation and Finance aims to clarify in recently released draft regulations.
Under New York’s 2014 Budget Act, NOLs incurred beginning on or after Jan. 1, 2015, may be carried forward 20 years and back three years, but not to a tax year beginning before Jan. 1, 2015. In computing the business income base for tax years beginning on or after Jan. 1, 2015, New York taxpayers are allowed both a prior net operating loss (PNOL) conversion subtraction and an NOL deduction, applied in that order, against the business income base.
The PNOL preserves the value of NOLs from tax years before unitary combined reporting took effect for use in post-unitary combined reporting periods. A taxpayer is permitted to use the PNOL over a 10-year period on a pro rata basis, but may not use an NOL that was not included in a prior New York tax filing to offset income of the new unitary combined reporting group. The NOL deduction is the amount of NOLs incurred in a tax year beginning on or after Jan. 1, 2015, multiplied by the apportionment factor for that year. NOLs incurred beginning on or after Jan. 1, 2015, may be carried forward 20 years and back three years, but not to a tax year beginning before Jan. 1, 2015.
Unused NOLs generated before the taxable year 2015 will be converted to a subtraction deduction, which is called “the PNOLC subtraction” and applied against the taxpayer’s apportioned business income. The draft regulations detail the computation of PNOLC subtraction amounts, address how the new combined reporting rules affect the PNOLC subtraction, and include other rules specific to the PNOLC subtraction as well as examples.
“Specifically, the draft regulations would require that each component corporation of a pre-2015 combined group calculate a separate-company unitary net operating loss (UNOL) based on the individual corporation’s contribution to the group’s base year loss,” said Christopher L. Doyle, partner with Hodgson Ross LLP in Buffalo, New York and coauthor of the Bloomberg BNA New York Corporate Income Tax Navigator (subscription required). “The separate-company UNOLs are then converted into separate-company PNOLCs by multiplying those UNOLS by the combined group’s base-year business allocation percentage and tax rate,” he explained.
“While this adds greatly to the complexity of the calculations, it may be necessary because: (1) combined groups under tax reform may be different than under pre-reform law, and (2) corporations leaving a post-2014 combined group will need to be able to take their PNOLCs with them,” Doyle said.
What are some other examples of complex transition rules created after New York’s 2014 tax reform? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.
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