Contemplating Potential Consequences to Changes in the Net Operating Loss Rules


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There are current tax rules that permit corporations to carry net operating losses from two previous taxable years and ensure these amounts are carried to current or the future for up to twenty years. These are offset at 100 percent for federal income taxes for the company and may also affect most of the other types of taxes.

The consequences of these net operating loss rules could affect numerous companies in various manners. A change was proposed in 2017 to alter these existing rules. All net operating losses would cease other than disaster relief legislation through government protocols. This is for the previous net losses sustained. However, carryforward periods for these losses would also change from the set twenty to an indefinite period. The other 90 percent of other types of income and taxes could also change based on proposed alterations by the Senate. The 90 could become 80 percent for these offsets.

Possible Consequences

Changes to the current and past used NOL rules could affect numerous businesses negatively. The impact felt could cripple many small businesses that rely upon the carrybacks. By carrying these taxed income amounts forward for a few years, the entities may remain afloat when it is not possible in other circumstances. Additional disaster relief may provide support on top of the NOL rules. However, offsetting losses is important to maintain profits, revenue and solvency. Bankruptcy is possible with NOLs alterations. This negative effect could carry over into the general economy and harm other businesses and the stability of markets.

Reporting issues are a potential consequence to the new carryforward period that is part of the new proposal. The net operating losses affected by these changes could lead to different recorded deferred tax assets by loss corporations. Uncertain NOLs may lead to needed contra assets records, a valuation allowance documentation and similar items necessary to offset these deferred tax assets for future changes and utilization. Limits of the 20-year period are significant factors for the imposed alterations to current rules. The record of a valuation allowance is necessary when generated before the changeover on December 31st, 2017. However, due to the indefinite period after this date, no new valuation allowance records will be compulsory.

Provisions of the NOL

Unutilized NOLs may increase through a factor of four percent for short-term tax-exempt rates in these years. The Senate bill that proposes the changes does not include this provision. Additional accounting methods or changes to current processes may become necessary if the bill affects the NOLs in this manner. Deductions alterations could affect operating losses. Adjustments change these procedures and may incur different multipliers than previously used. Small businesses may need a professional accountant or tax consultant to remain apprised of these differences and what is necessary to stay solvent.

Considering the Consequences

The effective changes to net operating loss rules could lead to severe consequences to various companies. The considerations are not often in the thought processes of elected officials for small businesses or loss corporations. This could lead to negative effects with local markets, the economy of some states with these loss companies and consumers in these locations. Additional factors may exist that protect the business from operating at a loss and losing more money through no option to claim these losses. However, this information requires distribution once it has been written and implemented by lawmakers.

Other circumstances could exist in these situations. When a hired accountant or tax consultant’s hire is necessary, the information and research into new methods reveals options open to the business owners. This may require additional funds to hire experts, but without their expertise, losses may increase significantly. Through changes in the NOLs and the ability to carry forward these losses, companies are affected in different ways. A professional bookkeeper or tax expert may uncover these details. These persons may also assist the customer in other revenue avenues in the company. If it is necessary, a lawyer’s hire may assist the owner in avoiding violations and staying solvent.

Legal Assistance in NOL Changes

The discovery of a problem may merit the hire of a lawyer. These could include violations of laws, accounting errors, tax issues and similar complications. The legal representative will protect the rights of the business owner in these circumstances. It is possible additional resources are available through the lawyer as well. This may prevent future violations or problems. Understanding the NOL changes is often possible through a lawyer’s support.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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