Question

A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL,

A) the taxpayer must carry forward the loss and has up to 20 years to use it.
B) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years.
C) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.
D) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up.

Answer 1

For losses incurred in years beginning after 2017, taxpayers can carry forward a net operating loss indefinitely to offset future taxable income, subject to an 80% taxable income limitation for tax years beginning after 2020. There is no longer an option to carry back NOLs for these years.

Step-by-step explanation:

When a taxpayer incurs a net operating loss (NOL) in the current year, the tax treatment of this NOL depends on the tax laws in effect for the year in which the loss occurs. For losses incurred in tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) made significant changes to NOL rules. The taxpayer can no longer carry back the NOL to prior tax years, but they can carry forward the loss indefinitely. The loss can be used to offset future taxable income until it is fully utilized.

However, it's important to note that the utilization of NOLs is subject to limitations. For tax years beginning after 2020, the amount of NOL that can be used to offset taxable income is limited to 80% of the taxable income (computed without regard to the NOL deduction). Despite this limitation, the carryforward of losses allows businesses to smooth out their income and manage their taxes over a longer period when they face sustained patterns of losses.