- New York Tax Reform Made Easy: Net Operating Loss
- April 24, 2014
- Law Firm: Sutherland Asbill Brennan LLP - Washington Office
The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address the creation of the Prior Net Operating Loss deduction.
Net Operating Losses
The Budget makes significant changes to the creation and use of net operating losses (NOLs) for purposes of the unitary combined reporting regime. The treatment of NOLs will differ significantly for those created prior to the adoption of the Budget’s combined reporting regime.
1. NOLs Created Pre-Adoption of Unitary Combined Reporting
For NOLs created during pre-unitary combined reporting periods, the Budget converts the NOL into a prior net operating loss conversion subtraction (PNOL). The PNOL was created to preserve the value of the pre-unitary combined reporting NOLs for use in the post-unitary combined reporting periods. As a result of the change to the filing methodology, the PNOL construct prevents the use of NOLs that were not included in a prior New York tax filing to offset income of the new unitary combined reporting group.
Taxpayers are permitted to use the PNOL over a 10-year period on a pro-rata basis (10% per year). If a taxpayer is unable to use the entire 10% of PNOL permitted in a tax year, it is permitted to carry forward the excess limit to the subsequent tax years through 2036. A taxpayer’s PNOL is applied to offset taxable income of the group before its post-unitary combined reporting NOL is utilized. A taxpayer can make an election to use its PNOL more quickly, in the 2015 and 2016 tax years (no more than 50% per year), but an electing taxpayer is not permitted to carry forward any of its PNOL after the 2016 tax year if it fails to use all of the PNOL. As a result, taxpayers must be sure that they will be able to utilize the PNOL in the 2015-2016 tax years (taking into consideration the alternative tax base calculations) before making such an election.
A Corporate Franchise Tax filer is permitted to calculate a PNOL with the “unabsorbed net operating loss” from the last tax period (Base Year) prior to the implementation of the new unitary combined reporting regime. An unabsorbed net operating loss is defined as the unused NOL pursuant to N.Y. Tax Law §§ 208.9(f) or 1453(k-1) “that was not deductible in previous taxable years and was eligible for carryover on the last day of the base year subject to the limitations for deduction under such sections . . .” A taxpayer multiplies its unabsorbed NOL by its Base Year effective tax rate (business allocation percentage and tax rate). The sum is then divided by 6.5% to arrive at the PNOL pool that can be used in the post-unitary combined reporting periods.
2. NOLs Created Post-Adoption of Unitary Combined Reporting
For NOLs created post-unitary combined reporting (i.e., tax years beginning on or after January 1, 2015), taxpayers are permitted to carry forward an NOL for 20 years and carry back an NOL (created by members included in the unitary combined report) for three years.
3. Application of NOLs to Unitary Combined Business Income
Historically, New York tax law limited the taxpayer’s use of an NOL to the extent an NOL was used for federal income tax purposes. The taxpayer’s use of an NOL in the unitary combined reporting period is no longer limited to the amount of the federal NOL deduction. In addition, taxpayers were required to use the NOL deduction to the extent available to eliminate any entire net income, regardless of whether one of the other alternative bases would have exceeded the entire net income base. The Budget eliminates this restriction. Therefore, the NOL is used only to the extent that the entire net income based tax is exceeded by the capital or fixed tax bases.