The new tax laws ushered in by the Tax Cuts and Jobs Act (TCJA), otherwise known as tax reform, will have a significant impact on the reporting and tax obligations related to the net operating loss (NOLs) for businesses that are organized as corporations. If your business is structured as a corporation, and you have NOL (see the definition below) questions, please contact our New York City CPA firm.
What is a NOL and how do you know if you have one? A net operating loss, or NOL, is realized when a loss taken by a company in a certain period (usually a tax year) makes its allowable tax deductions greater than its taxable income. In this situation, the NOL has traditionally helped companies recover past tax payments with the carryforward rule in place. However, the treatment of NOL for corporations is changing starting this tax year, due to the effect of the following new provisions:
Tax changes related to NOL which may apply to your freelance business:
- The income limitation for NOL is reduced. Starting this year, if you own a corporation, you can establish a NOL for a maximum of 80 percent of your taxable income. This is in contrast to previous years when you could offset all of your taxable income with a NOL. If your total NOL is less than 80 percent of your taxable income, then you would only be able to claim the lesser amount.
- Carryforward and carryback allowances for NOL are changed. Under the old tax rules, corporations could claim any NOL amounts back two years to lower their tax obligations. Not any longer (the exception being for non-life insurance companies and farming businesses). As far as carryforwards of NOL (i.e. excess net operating losses above the 80 percent of your taxable income) are concerned, these can be carried forward indefinitely until they are exhausted. The exception to this is for non-life insurance companies, which keep the previous 20-year carryforward rule.
These changes may have a significant impact on your business if you have traditionally had net operating losses, or if you are a start-up business with considerable expenses and proportionally less income. If this is the case for you, you should be prepared that your tax bill may increase this year. You may also want to consult with our New York City tax accountant to look at additional alternatives for reducing your taxable income this year and for years when you anticipate having fewer NOL deductions.