By Deborah G. Kosnett, CPA
You may or may not have heard that tax reform has done away with the corporate alternative minimum tax (AMT), and also has made significant changes to the deductibility of net operating losses (NOLs). Additionally, exempt organizations with unrelated business income (UBI) will have to deal with new net loss restrictions: NOL deductions are now restricted to the unrelated trade or business activity that generated them – and will be further limited to 80% of taxable income. These changes are effective for tax years beginning after December 31, 2017.
However, all pre-2018 NOLs are still available under the old rules, and some organizations may have significant existing NOL carryforwards. Here’s what you need to know with regard to old-law and new-law NOLs, and how old-law NOLs and the AMT repeal might actually reap an unexpected benefit.
- Net operating losses arising before 2018 will still expire after 20 years, but they may be applied to any and all UBI activities until fully used or expired. Furthermore, as there will be no more corporate AMT, there will be no AMT NOL limitation for old-law loss carryforwards.
- NOLs arising after 2017 will be limited both by the UBI activity restriction and by the 80%-of-taxable-income restriction. Additionally, no carrybacks will be permitted, though post-2017 NOLs will never expire. It is unclear at present exactly how the 80% NOL limitation will be applied to UBI activities, but it would seem logical that the limitation would be activity-by-activity.
- For 2018 and forward, the corporate AMT provisions have been repealed. However, new-law NOLs will only be deductible to the extent of 80% of taxable income. In essence, the old AMT NOL limitation has been incorporated into regular tax law, and has been made more severe (an 80%-of-taxable-income limitation, vs. the old-law 90% AMT limitation).
However dismal these changes might sound, a few bright spots can be found. The interaction of the old rules and the new rules can sometimes have a surprising result. For example, here is one way that the use of old-law NOLs, coupled with the repeal of the corporate AMT, can actually provide a favorable result.
Let’s say that your organization has a significant amount of pre-2018 NOLs, along with considerable current UBI. Prior to tax reform, you might have had no regular tax liability, because you would have been able to deduct your net loss carryforwards – BUT you might have been paying tax under the corporate AMT rules, as your “AMT NOL” deduction would have been limited to 90% of your alternative minimum taxable income.
For 2018 forward, those old-law NOLs are still fully deductible against any and all taxable UBI, until they are fully utilized or expired. And, with no more corporate AMT to deal with, your taxable income after applying old-law NOLs will be zero – no more AMT liability resulting from these NOLs.
Not unexpectedly, the law of unintended consequences may be hard at work with regard to the substantial changes resulting from this latest round of tax reform. For example, consider the complex situation that might exist if, say, an association has not only substantial UBI, but also a very active taxable subsidiary. In such an instance, the organization will need to be conversant not only with the exempt organization tax reform changes, but also those changes applicable to regular corporations. It’s not inconceivable that these two sets of rules may conflict in unexpected ways. So, stay tuned! We’ll delve into this in a future article.
Deborah G. Kosnett, CPA is a tax principal with Tate & Tryon, CPAs, and may be reached at [email protected].