Net Operating Loss Rules Challenge Companies

The rules for claiming net operating losses to offset income tax liabilities can vary from state to state and are proving to be a big challenge for many companies, especially as both the economy and corporate profitability improve.

Bloomberg BNA recently released a study for which it surveyed 100 finance executives at C corporations in the U.S. in a range of industries. The survey found 88 percent of the finance executives anticipate their companies will move into profitable years in the near future. However, 39 percent of the survey respondents cited “state carryback/forward rules” as the biggest challenge they face when managing state NOLs. Coming in at a close second, at 33 percent, was “keeping up with state NOL tax law changes,” followed in third place, at 30 percent, by “state limitations.”

Spreadsheets and databases continue to be the main way for companies to manage state net operating losses. The survey found that 68 percent of the tax executives polled said they continue to use manual spreadsheets for managing and tracking state NOLs, despite their perceived risk, while 33 percent use databases such as Access. Over half (52 percent) of the survey respondents said they need to spend one to four weeks annually on spreadsheet and database maintenance

Companies can automate the process beyond spreadsheets and databases to alleviate those concerns, for example, by using the Bloomberg BNA State Tax Analyzer system, which includes an NOL Manager feature. Over one-third (37 percent) of the survey respondents ranked “risk of last minute changes” as their top NOL concern, followed by “data integrity” and “business continuity” (which tied at 32 percent). In addition, 29 percent of the respondents cited “the inability to forecast the burn-down rate of an NOL asset.”

After a certain time, net operating losses can no longer be carried forward or back. The federal Tax Code allows up to 20 years of NOL carryforwards and two of NOL carrybacks, but the rules can differ across the states. While 24 states have no carryback timeframe, 19 states have two-year carrybacks and three have three-year carrybacks. And while 27 states have 20-year carryforwards, eight have 15-year carryforwards, four have five-year carryforwards, one state allows a 12-year carryforward and another permits a seven-year carryforward.