NOL Explained: Navigating Carryforwards & Carrybacks for Federal and California Taxes
Can you explain the process of NOL (Net Operating Loss) carryforwards and carrybacks for both federal and California state taxes?
Net Operating Loss (NOL) occurs when a company's tax deductions exceed its taxable income in a given tax year. Under both federal and California state tax laws, NOL carryforwards and carrybacks can provide tax relief for businesses with fluctuating profits and losses.
Federal NOL Rules:
NOL Carrybacks: As a result of the Tax Cuts and Jobs Act (TCJA), effective for tax years 2018 to 2020, the NOL carryback provision was eliminated for most taxpayers. However, in response to the COVID-19 pandemic, the CARES Act temporarily reinstated NOL carrybacks for tax years 2018, 2019, and 2020. Companies can carry back losses for up to five years preceding the tax year of the loss. As of tax years beginning after 2020, carrybacks are again generally disallowed unless Congress enacts new legislation to change this.
NOL Carryforwards: For NOLs arising in tax years ending after December 31, 2017, the TCJA allows indefinite NOL carryforwards, but limits the NOL deduction to 80% of taxable income for the year.
California State NOL Rules:
NOL Carrybacks: California generally does not allow NOL carrybacks.
NOL Carryforwards: The California NOL carryforward rules depend on the tax year the NOL is generated:
For NOLs generated before January 1, 2019, the carryforward period is 20 years, with certain exceptions for eligible small businesses and specific industries. There is no limitation on the percentage of taxable income that can be offset by the NOL deduction.
For NOLs generated on or after January 1, 2019, the carryforward period is unlimited, but the NOL deduction is limited to 80% of the taxable income for the tax year, similar to the federal rule.
It's important to note that NOL carryforward and carryback rules may change over time due to new legislation or changes in tax laws. To ensure compliance with the most recent tax laws and accurate application of NOL rules, it's advisable to consult with a tax professional or CPA well-versed in federal and state tax laws.