The Magazine for European Companies setting-up in the U.S.

U.S. Tax Reform (Part 2) Use of net operating losses

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On December 22, 2017, President Trump signed into law the U.S. tax reform legislation, also known as the Tax Cuts and Jobs Act. This new legislation includes major changes to the previously existing tax system and will affect both businesses as well as individuals. 


Generally, the new legislation applies for tax years beginning after December 31, 2017. The IRS is working to develop guidance regarding the implementation of the U.S. tax reform legislation and publishes statements as it becomes available. Below are the highlights of the new corporate tax provisions which may have an impact on your business.
 

Use of net operating losses 

Typically, companies setting up a business in the U.S. generate losses in the first two to three years. Since the legislation regarding net operating losses may have a significant impact on their overall tax costs, the new rules should be taken into account in their implementation strategy.

The modifications to the rules regarding net operating losses (NOL) is one of the measures in the 2017 U.S. tax reform Act aimed at increasing revenue to offset the corporate tax rate reduction.

                                 NOL deduction is limited to 80% of taxable income. Carrybacks are no longer allowed

Under the previously existing rules, NOLs can be carried back two years, carried forward 20 years and no taxable income limit applies. For NOLs arising in tax years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (calculated without taking into account the NOL deduction). Carrybacks are no longer allowed for NOLs arising in tax years ending after December 31, 2017, but the carryforward period for unused NOLs is now indefinite.

Example: a company has $1 million dollar NOL through December 31, 2017 and $18 million dollar NOL in the tax year ending December 31, 2018. For the tax year ending December 31, 2019, the company generates taxable income of $15 million. As a result, the 2019 taxable income would amount to $2 million (the $1 million 2017 NOL can be used without limitation, the 2018 NOL is limited to 80% of the 2019 taxable income i.e. $12 million) and $6 million NOL can be carried forward indefinitely.

 

Authors: Antoine Guillaud, Ben Troch, Pierre Arrouy

Chicago January 31st 2018

 

This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.

 

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