The Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended the 80% limit on federal net operating loss (NOL) deductions. The 80% taxable income limit on NOLs from 2018, 2019, and 2020 tax years does not take effect until after the 2020 tax year.
It may come as a surprise, but the federal NOL limit under IRC Sec. 172, including the CARES Act change, has little impact on most state corporate income taxpayers.
Most states with a corporate income tax do not adopt the CARES Act change because:
- the state NOL deduction does not follow IRC Sec. 172 computation rules;
- the state sets its own NOL limit; or
- the state has an IRC conformity tie-in date or provision that does not adopt the change.
The remaining states adopt the CARES Act change because:
- the state has rolling IRC conformity and follows IRC Sec. 172 computation rules; or
- the state allows the federal deduction without modification and has no separate NOL deduction.
Which States Do Not Adopt CARES Act NOL Limits?
19 states allow an NOL deduction that taxpayers determine based on state rules and not on IRC Sec. 172 rules.
| Alabama | Arkansas | Idaho |
| Iowa | Louisiana | Massachusetts |
| Michigan | Mississippi | Montana |
| Nebraska | New Jersey | New York |
| North Carolina | North Dakota | Oregon |
| South Carolina | Tennessee | Vermont |
| Wisconsin |
8 states set their own limit on NOL deductions.
| Colorado | Connecticut | District of Columbia |
| Minnesota | New Hampshire | New Mexico |
| Pennsylvania | Utah |
8 states have an IRC conformity tie-in date or provision that does not adopt the CARES Act change.
| Arizona | California | Florida |
| Georgia | Hawaii | Indiana |
| Virginia | West Virginia |
Which States Adopt CARES Act NOL Limits?
4 states have rolling IRC conformity and follow IRC Sec 172 computation rules
| Alaska | Illinois | Kansas |
| Oklahoma |
Rhode Island does not have an IRC conformity provision. But, the starting point for computing taxable income is federal taxable. The state allows a NOL deduction that taxpayers compute based on IRC Sec. 172.
2 states allow the federal deduction without modification and have no separate NOL deduction.
| Delaware | Missouri |
Maryland recognizes the federal NOL as the state NOL deduction for computing taxable income. It has a unique IRC conformity tie-in provision that allows decoupling if it determines the revenue impact from federal changes is more than $5 million. So, it will require an addback if a taxpayer’s NOL carryforward for the 2020 tax year exceeds 80% of taxable income.
Maine has a fixed IRC conformity date that does not adopt the CARES Act change. But it allows a deduction for the amount of a taxpayer’s federal NOL that is subject to limitation under IRC Sec. 172. So, taxpayers effectively get the benefit of the CARES Act suspension of the federal NOL limit.
By Timothy Bjur, J.D.
COVID-19 Related Links/Tags
Wolters Kluwer is by your side to help you stay up-to-date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.
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