One of the changes in the new tax law is a limit of net operating loss (NOL) carryover deductions. Under previous law, a farmer could carry forward a net operating loss and offset the deduction against 100% of taxable income. The new law changes this to only allowing an offset against 80% of taxable income. However, old pre 2018 NOL carryovers are grandfathered in to offset 100% of taxable income.
The possible glitch is in the definition of taxable income. Is it before or after the pre-2018 NOL carryovers. Let's look at an example:
Farmer Smith has a 2017 loss carryover into 2018 of $800,000. During 2018, he generates another NOL of $200,000. He has a very profitable year in 2019 and makes $1 million of taxable income before any NOL deduction. The 2017 $800,000 NOL will reduce his taxable income to $200,000. 80% of this number is $160,000 and most taxpayers would assume that the 2018 $200,000 NOL would be available to offset this $160,000 of income leaving $40,000 of taxable income. However, some commentators believe none of the 2018 NOL carryover will be allowed since 80% of taxable income is based on taxable income before the 2017 NOL carryover. In this case, that would be $800,000, leaving $200,000 being subject to tax.
As you can see, this is a large difference. We will need IRS guidance to resolve this question. Once we get it, we will provide an update.
