Recent developments involving limitations to state NOL usage.

• Author: Yesnowitz, Jamie C.
• Position: Net operating losses

As businesses continue to recover from the pandemic, many have experienced dramatic economic difficulties that may ultimately manifest as operating losses. From a federal perspective, the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, in 2017 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, in 2020 significantly changed the historic treatment of net operating losses (NOLs) for federal income tax purposes. The TCJA provisions, specifically, limit allowable NOL deductions to 80% of federal taxable income and lift the previously imposed 20-year limitation on carryovers. While the TCJA provisions disallow NOL carrybacks, the CARES Act temporarily and retroactively allows NOLs incurred in tax years beginning in 2018, 2019, or 2020 to be carried back five years or carried forward indefinitely, at the taxpayer's election. From a federal standpoint, the CARES Act change was intended to grant taxpayers a degree of relief from the economic difficulties created by the pandemic.

As states have historically employed myriad ways to account for operating losses on a current basis, as well as unique carryover and carryback provisions, tracking the ability to utilize operating losses at a state level has long been a complex and time-consuming endeavor. Over the past two years, as states have reckoned with their own financial difficulties and decided whether and how to conform to the many significant tax provisions included in the TCJA and the CARES Act, NOL treatment has certainly not escaped notice. Some states, in efforts to address budgetary woes and maximize revenue, have acted to limit taxpayers' ability to offset taxable income with recognized losses. This item focuses on legislative developments in California, Illinois, and Kansas, as well as judicial decisions in Pennsylvania and New Jersey, that highlight imposed limitations on NOL usage.

Legislative changes

Using legislation to craft policy, California, Illinois, and Kansas have recently enacted state-specific limitations on NOL usage.

California: In June 2020, California enacted legislation expected to raise $9.2 billion in taxes over a three-year period, in part by amending the California Revenue and Taxation Code to suspend the use of NOLs for most taxpayers for tax years beginning in 2020, 2021, and 2022 (Ch. 8 (A.B. 85), enacted June 29, 2020). This is not the first time California has acted to restrict the use of NOLs. California suspended NOLs...