What Does 80% of Taxable Income Mean

Published on: 13:58PM Mar 20, 2018

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.