FAQs: COVID-19 - State Net Operating Loss (NOL)

Alerts / March 24, 2020
Q: State NOL Carryback Relief: If the federal government enacts NOL carryback relief, will states follow suit?

A: Almost no states currently allow taxpayers to carryback NOLs to prior years. States are unlikely to change this policy at the present time to provide liquidity to distressed taxpayers. This is because economic disruption caused by COVID-19 is likely to leave states with severe budget shortfalls. Unlike the federal government, states typically are unable to provide financial relief to taxpayers outside of existing funds (e.g., they cannot print money) and annually have to produce a balanced budget. As a result, states with depleted budget reserves are unlikely to exacerbate their budgetary situation by offering NOL carrybacks. In fact, during times of fiscal distress, states often restrict NOL usage as a means of increasing tax revenue without increasing tax rates.

Q: State Tax Conformity: Are states that conform their taxation laws to the Internal Revenue Code likely to conform to any NOL carryback relief enacted by the federal government?

A: Some states base their NOL regime on the Internal Revenue Code, with state-level adjustments. If the federal government enacts NOL carryback relief, taxpayers should be prepared for these states to decouple from the Internal Revenue Code NOL carryback provisions to maintain their preferred NOL policies and financial resources.

Q: State NOL Carryforwards: Will states extend the period of time in which NOLs may be carried forward?

A: Most states currently allow NOL carryforwards. State NOL carryforward periods range from eight years to an unlimited duration (with several states at 10-year or 20-year NOL carryforward periods). In the short term, states may hesitate to increase the NOL carryforward period, especially as doing so offers no immediate financial relief to taxpayers. However, as the crisis subsides and a clearer economic outlook emerges, taxpayers should consider pursuing legislative efforts to preserve the value of their NOLs (including for financial statement purposes). States may become more amenable to extending the NOL carryforward period as they regain confidence in the stability of their tax base.

Q: Preservation of State NOL Value: May taxpayers take actions today to preserve the value of their state NOLs?

A: Taxpayers may consider a few action items to preserve the value of NOLs generated during the COVID-19 economic disruption. First, taxpayers should consider taking steps to maximize the amount of NOLs in states where they anticipate future taxable income. For example, state apportionment planning may enable a taxpayer to increase its state NOLs in those states that determine NOLs on a post-apportionment basis (i.e., the NOL is apportioned in the loss year and carried forward as a state NOL). State apportionment planning also should include strategic consideration of alternative apportionment opportunities – an issue taxpayers often overlook in loss years – to ensure that NOLs are advantageously assigned to states for future use.

Taxpayers also should implement procedures for documenting state NOLs, including maintaining documentation of losses, apportionment factors in loss years, and changes to combined or consolidated group composition (e.g., for application of state-level SRLY and similar rules).

Authorship Credit: Matt Hunsaker and Michael J. Semes

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