The recently released JCT Bluebook may help clear up confusion about effective dates for net operating loss (NOL) changes made by the Tax Cuts and Jobs Act of 2017 (TCJA). However, Congress might still need to pass a technical correction to clarify the date.
The Bluebook is formally known as Joint Committee on Taxation’s General Explanation of Public Law 115-97 (JCS-1-18).
NOL Changes in the TCJA
The TCJA made three significant changes to the NOL rules. The new law:
- limits the NOL deduction to 80% of taxable income,
- eliminates most NOL carrybacks, and
- allows an unlimited carryforward for most NOLs.
NOL Changes Have Different Effective Dates
Unfortunately, these changes have different effective dates.
The 80% limit on NOL deductions applies to losses in tax years beginning after December 31, 2017.
However, the changes to the NOL carryover and carryback rules apply to losses arising in tax years ending after 2017.
This conflict is surprising since the committee report to the TCJA states that all of the NOL changes apply to losses arising in tax years beginning after 2017.
NOL Effective Dates and Fiscal-Year Taxpayers
The different effective dates for the NOL changes can be especially important to 2017/2018 fiscal-year taxpayers.
These taxpayers may not be able to carry back an NOL arising in the 2017/2018 fiscal-year since the NOL arose in a tax year ending after 2017.
On the other hand, the 80% deduction limit won’t apply because the NOL did not arise in a tax year beginning after 2017.
JCT Bluebook Agrees Effective Dates Should be the Same
The JCT Bluebook confirms the TCJA Committee Report. Both agree that the NOL changes should apply to losses in tax years beginning after 2017.
The JCT report further explains how a taxpayer with NOL carryovers from both tax years beginning before 2018 (pre-2018 NOL carryovers) and tax years beginning after 2017 (post-2017 NOL carryovers) should compute its tax liability:
- The 80% limit shouldn’t apply to the pre-2018 NOL carryovers.
- The taxpayer should have an additional NOL deduction equal to the lesser of (i) its post-2017 NOL carryovers, or (ii) 80% of taxable income over the pre-2018 NOL carryover deduction.
- Any remaining pre-2018 NOL should remain subject to the pre-TCJA carryback and carryover rules.
However, the Bluebook notes that a technical correction may be necessary to reflect this effective date for all of the NOL changes.
By Liliana Dimitrova, LL.B., LL.M.