Although P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), cut the top corporate income tax rate from 35% to 21% and provided a 20% deduction for qualified passthrough and sole proprietor-ship business income (see "Mechanics of the New Sec. 199A Deduction for Qualified Business Income," page 44), the law's changes to the net-operating-loss (NOL) carryback/carry-forward rules may lessen the full effect of the rate reduction or deduction for taxpayers with NOLs arising in tax years beginning on or after Jan. 1, 2018.
NOLs BEFORE THE TCJA
The TCJA's change in treatment of NOLs is not without precedent. An operating loss carryback/ carryforward deduction was first enacted in 1918 as a temporary, war-related measure. Carrybacks and/or carryforwards have been allowed, expanded, or removed from the Code numerous times. The allowance of operating loss carrybacks and carryforwards has long been seen by Congress as a means to treat more equally taxpayers with similar average incomes but different earnings cycles that span periods longer than a tax year.
An NOL generally is the amount by which a taxpayer's business deductions exceed its gross income (Sec. 172(c)), subject to certain modifications provided under Sec. 172(d). In general, prior to the TCJA, an NOL could be carried back up to two tax years and forward up to 20 tax years to offset taxable income. NOLs offset taxable income in the order of the tax years to which the NOL may be carried, although a taxpayer could elect to waive the carryback period. Special extended carryback periods were allowed for NOLs attributable to certain specified liability losses and certain casualty and disaster losses. NOLs attributable to certain farming activities were allowed a five-year carryback. Limitations were also placed on the carryback of certain excess interest losses attributable to corporate equity reduction transactions and NOLs of real estate investment trusts.
NOLs UNDER THE TCJA
Under the TCJA, the NOL deduction for a tax year is equal to the lesser of (1) the aggregate of the NOL carryovers to such year, plus the NOL carrybacks to such year, or (2) 80% of taxable income (determined without regard to the deduction) (Sec. 172(a)). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely (Sec. 172(b)(1)(A)). The special extended carryback provisions are generally repealed, except for certain farming and insurance company losses.
For any portion of an NOL...