New Loss Rules Surprise Businesses

The recent tax law changes changed the treatment of business losses for most Oklahoma small businesses.

Prior to 2018, net operating losses (NOLs) could be carried back 2 years or forward 20 years to offset income. The new law eliminates the ability to carry back the losses to prior years.

Additionally, there is now no limit to how long the losses can be carried forward. Personally, I think this is a net loser for most businesses. If you have a cyclical business that generates a large amount of income one year followed by a loss the next (e.g oil and gas companies), you can no longer carryback the loss to the prior years to smooth things out. I’ve never seen a NOL carried forward for 20 years, so I’m not sure how eliminating that limit really helps anyone.

But wait! There’s more fun. NOLs are now limited to 80% of taxable income. Prior to the law change, it was 100%. So if you have taxable income of $100k and a NOL of $100k, you can only deduct $80k. The remainder can be carried forward to offset future income, but in general, this sucks. If you think about it, you had income of $100k in one year followed by a $100k loss the following, you’re net zero. Under the current law, you still get to pay tax.

Lastly, the new law sets a new limit for business losses that previously didn’t exist. Business losses from an active businesses that flow through to the taxpayer (e.g. S-corporation, partnerships) are limited to $500k. Excesses can be carried forward to future years, but this limit could be significant to some. Those with large incomes that try to offset with losses from investments in other businesses (again I’m thinking of oil and gas exploration) now face an additional limit on those losses. To read more about the recent tax law changes, check out this article.