The Negative Effects of the New NOL Rules

Although the recent tax reform made a lot of good changes for the small business owner, there are some changes that are not so good.

For example, the changes to the net operating loss (NOL) deduction rules are designed to hurt you and put money in the IRS’s pocket.

Unlike before, if you now have a bad year in your business, the new NOL rules will stop you from using your business loss to find some immediate cash.

Here’s more on how the new rules differ from the prior beneficial rules:

Under the Old NOL Rules:

When your business deductions exceed your business income in a taxable year, you have a NOL.

Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.

Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.

Under the New NOL Rules:

The new tax reform made two key changes to the rules:

  1. You can no longer carry back the NOL (except for certain qualified farming losses).
  2. Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.

This in turn puts more money in the IRS’s pocket by:

  • eliminating your ability to get an immediate tax benefit from your NOL carryback, and
  • delaying your ability to get tax benefits from future NOL carryforwards.

For more information about the NOL rules and for strategies to help you get some immediate benefits from your business loss, give us a call at (732) 566-3660.

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