Tax Reform for Individuals: Net Operating Losses (NOL)

A net operating loss, or more commonly known as a NOL, is a loss that has occurred in a business when business expenses exceed revenue. Under the Tax Cuts and Jobs Act (TCJA), the rules directing these losses on an individual’s tax return have changed significantly, and not necessarily in favor of taxpayers, like several of the other changes that were passed.

Previous Law

Under the previous law, a NOL could be taken to offset up to 100% of individual taxable income. Once a NOL was incurred, they could be carried back to the two preceding tax years, then any remaining losses would be available to be carried forward for 20 years. Taxpayers could also elect to only carryforward the NOL to offset only future income.

New Law

As a part of the new TCJA, any NOL created in 2018 or later will only be able to offset income up to 80% of taxable income. The TCJA also removed the option to carryback to the previous two years any NOL. However, a NOL will be allowed to be carried forward indefinitely, and will not be lost if it exceeds 20 years.

Impact on Individuals

These changes can have a huge tax consequence for taxpayers. By only allowing 80% of taxable income to offset, individuals with difficult years in their business could still owe hefty tax bills on investment income, wages or other income.

In the past because of the carryback allowance, individuals were able to amend the two previous years of tax returns and apply for immediate refunds after a huge business loss in that year. By doing this, it would allow individuals the ability to invest this extra cash into their businesses immediately. Under the new law, this isn’t allowed and may hurt struggling businesses.

Any NOL’s that were created on or before December 31, 2017, will follow all prior law. They will still be able to be deducted up to 100% of taxable income, and only carried forward for 20 years.

Another significant change as part of the new TCJA is the limitation of excess business losses for taxpayers other than corporations. Visit our Tax Reform Resource Center for resources on how the tax reform will impact you, your family and your business. Contact an Anders advisor with questions on how the new tax law will affect you.