The new tax law made several changes to how farmers treat net operating losses (NOL). Here is a list of most of the major changes:
– A farmer is now only allowed to carryback a $500,000 net operating loss. Any losses in excess of this amount have to be carried forward as part of the net operating loss carryover to the following year. Previously, farm losses and net operating losses were unlimited unless the farmer had received a loan from the Commodity Credit Corporation. In that case, farm losses were limited to the greater of $300,000 or net profits over the previous five years. Any excess losses were carried forward to the net year on Schedule F or related form.
– NOLs can now only be offset against 80 percent of taxable income. In the past, you could offset 100 percent of taxable income.
– NOLs can no longer be carried back five years (if you are a farmer) or two years (if you are a non-farmer). Farm NOLs can only be carried back two years, and all others have to be carried forward. The good news is that they will not expire after 20 years (unlike the old law).
Most everyone assumed these new rules would apply for taxable years beginning after December 31, 2017. That is the case for the rule on limiting NOLs to offsetting 80 percent of taxable income. However, the rules on NOL carryback and carryforwards including farm losses begins for years ending after December 31, 2017. This means that any farm fiscal C corporation ending in 2018 will not be allowed to carry back their NOL five years. Instead, they can only carry it back two years. All other corporate taxpayers will not be able to carry back any NOL. Instead, they must carry it forward.
We are not sure if this was the intention of Congress or not. If not, they may try to get it changed; however, with the current political situation, that may be difficult to do. If you are in this situation, you will have at least three years to carry back the net operating loss. So if Congress does make a change in the next year or two, remember to carry back that loss and free up some working capital.
If you know that you may have a large NOL for your fiscal year ending in 2018, you may want to consider discussing with your tax advisor if switching to a calendar-year C corporation is available. If it is available, this may allow you to carry the loss back five or two years for non-farm losses. However, changing your year-end is not always automatic. If not, you are required to get permission from the IRS and should have a business reason for the change. Simply telling the IRS that you want to carry back your loss will likely not fly. iBi
Paul Neiffer specializes in income taxation, accounting services and succession planning for farmers and agribusiness processors. John Rassi is the local contact for CliftonLarsonAllen. Contact him at [email protected] or (309) 557-1200.