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How did the TCJA impact NOL?

The Tax Cuts and Jobs Act (TCJA) led to major tax reform. We are starting to see the impact of these changes as individuals begin filing their tax returns for the 2018 tax year. Because the changes were so large, it is helpful to focus in on specific areas to understand how the TCJA affects that part of a taxpayer’s tax returns.

One example: net operating loss (NOL).

What is a NOL? A NOL occurs when a taxpayer’s deductions for a given tax year are more than their income.

The IRS has specific rules on what expenses a taxpayer can deduct to determine an NOL. In general, taxpayers are not allowed to deduct certain capital losses that are greater than capital gains and deductions that are not related to business or trade. Examples that the IRS does not allow include alimony paid, IRA contributions and health savings account deductions.

NOL calculations can take into account capital losses that were not beyond capital gains, moving expenses, educator expenses, ordinary loss on the sale of stock, loss on sale of accounts receivable and casualty or theft losses that result from a federally declared disaster.

What is the benefit of an NOL? The IRS allows a taxpayer to deduct an NOL from the taxpayer’s income in another year. A taxpayer with an NOL over 80 percent of their taxable income may need to carry some of the NOL over to another, future tax year.

What has changed? In the past, there were more options to carry the NOL back to previous tax years. The TCJA essentially tightened these rules. Due to these changes, taxpayers can generally only carry NOLs that occur after December 31, 2017 forward.

There are some exceptions, primarily within the farming industry. In many cases the IRS will allow farmers to continue to carry NOLs back two years.

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