Change in treatment of net operating losses (NOLs)
Due to corporate tax reform, NOLs incurred in tax years beginning prior to January 1, 2015 (pre-reform losses), and NOLs incurred in tax years beginning on or after January 1, 2015 (post-reform losses), are treated differently under Tax Law, Article 9-A. As a result, how Article 9-A taxpayers claim deductions for NOLs has changed significantly. This has important filing implications:
- Generally, taxpayers cannot report any NOL deduction on their 2015 Form CT-3, General Business Corporation Franchise Tax Return, or 2015 Form CT-3-A, General Business Corporation Combined Franchise Tax Return, Part 3, line 18.
- Taxpayers must use their NOL carryforwards from tax years prior to 2015 to compute a PNOLC subtraction on the 2015 Form CT-3.3, Prior Net Operating Loss Conversion (PNOLC) Subtraction, and report the appropriate deduction on their 2015 Form CT-3 or CT-3-A, Part 3, line 16.
- Taxpayers that incurred a net operating loss in tax year 2015 may utilize the loss in tax years after 2015. An NOL incurred in tax year 2015 must be reported on the 2015 Form CT-3.4, Net Operating Loss Deduction (NOLD), even though a deduction is not allowed on 2015 Form CT-3 or CT-3-A, Part 3, line 18.
NOLs incurred in tax years beginning prior to 2015
Reform created a new deduction for pre-reform losses: the prior net operating loss conversion (PNOLC) subtraction. This subtraction locks in the tax value of all unused NOLs at the end of a taxpayer’s last tax year that began before January 1, 2015, and has specific utilization rules. It also benefits taxpayers by giving new life to NOLs that were due to expire after 2014.
The total value of the PNOLC subtraction pool is computed on the 2015 Form CT-3.3. This form also computes:
- the annual allotment of the pool;
- the amount of the PNOLC subtraction that can be used in the current tax year; and
- the amount of any available carryforward.
The PNOLC subtraction computed on Form CT-3.3 is then deducted on Form CT-3 or Form CT-3-A, Part 3, line 16. Form CT-3.3 must be filed with all schedules completed for every tax year that a PNOLC subtraction balance is carried, even if no subtraction can be applied in that tax year.
Small businesses - Taxpayers that meet the definition of a small business as of the last day of their 2014 tax year may use up to 100% of the PNOLC subtraction pool, with any excess carried forward until the pool is exhausted, but for no longer than 20 taxable years or the tax year 2035, whichever comes first.
A small business is a taxpayer, in its last pre-reform tax year (2014):
- whose ENI is not more than $390,000;
- whose total amount of money and other property received for stock, as a contribution to capital, and as paid-in-surplus, is not more than $1 million as of the last day of its 2014 tax year; and
- that is not part of an affiliated group, as defined in IRC section 1504, unless the group itself would have met the above criteria if it had filed a combined return.
50% election - Taxpayers may elect to use up to 50% of the PNOLC subtraction pool in tax years 2015 and 2016 on the 2015 Form CT-3.3. Any unused amount is forfeited after tax year 2016. This revocable election must be made on a taxpayer’s original, timely filed return for the tax year beginning on or after January 1, 2015, and before January 1, 2016, by the due date for such return (with regard to extensions). Form CT-3.3 must be attached to this return.
General method - Taxpayers can claim one tenth (1/10th) of the PNOLC subtraction pool each tax period. If an entire 1/10th allotment is not used, it can be added to the subsequent period’s allotment. After 10 tax periods, there is no limit on the amount of unused PNOLC subtraction that can be claimed. The entire pool is available for 20 tax periods or the tax year 2035, whichever comes first.
NOLs incurred in tax years beginning on or after January 1, 2015
As a result of the changes made to the treatment of NOLs by corporate tax reform, there should not be an amount reported on the NOL deduction line of Form CT-3 or Form CT-3-A, Part 3, line 18, for the 2015 tax year. Exception: Taxpayers that have two short 2015 tax years may have an amount reported on Form CT-3 or Form CT-3-A, Part 3, line 18, in the second short 2015 tax year if a loss was incurred in the first short 2015 tax year.
These NOLs are computed on Form CT-3.4. This form:
- computes the amount of the NOL deduction that can be used in the current tax year;
- computes the amount of any available NOL carryforward for future use;
- is used to make the election to waive the carryback of an NOL in the year in which such NOL occurs; and
- is used to report the specific tax years from which NOLs have been used to reduce apportioned business income.
Form CT-3.4 must be filed for every tax year, even when no NOL deduction is being used to reduce business income.
What to do if you incorrectly reported NOLs incurred in tax years prior to January 1, 2015, on your 2015 Form CT-3 or CT-3-A, Part 3, line 18
To correct your filing, you must file an amended 2015 tax return and:
- compute a PNOLC subtraction pool and annual allotment using the 2015 Form CT-3.3 and instructions;
Note: You are prohibited from making the 50% election on your amended tax return, as this election must be made on an original, timely filed 2015 tax return. Therefore, if you filed your original return and did not signify this method on Form CT-3.3, you must use the 1/10th allotment, unless you are a qualifying small business.
- enter the amount of the PNOLC subtraction from your 2015 Form CT-3.3, Schedule C, line 4, on your amended 2015 Form CT-3 or Form CT-3-A, Part 3, line 16;
- do not enter any amount on your amended 2015 Form CT-3 or Form CT-3-A, Part 3, line 18; and
- Form CT-3.3 must be attached to your amended 2015 tax return along with all other attachments and forms used in the computation of your return.
Additionally, if your 2016 tax return was filed prior to you amending your 2015 tax return, you must also amend your 2016 tax return and your 2016 Form CT-3.3 (and 2016 Form CT-3.4, if applicable) to reflect the changes made on your amended 2015 tax return and Form CT-3.3 (and Form CT-3.4, if applicable). Include these and all other attachments and forms to your amended 2016 return.
If you were subject to the metropolitan transportation business tax (MTA surcharge) in tax year 2015 or 2016, you must also file amended Forms CT-3-M as applicable.
What are the consequences of not amending my 2015 CT-3 or 2015 CT-3-A tax return to properly report my PNOLC subtraction pool and annual allotment?
If you do not amend your 2015 tax return to correctly report your NOLs incurred in tax years beginning prior to January 1, 2015, your ability to claim PNOLC subtractions in future years will be impacted due to the limitations on PNOLC subtractions and may result in the denial of a deduction, which could cause you to incur additional tax due, penalties, and interest.
Forms and instructions
You can find the 2015 corporation tax forms and instructions at: www.tax.ny.gov/forms/prvforms/corp_tax_2015.htm
You can find the 2016 corporation tax forms and instructions at: www.tax.ny.gov/forms/corp_genl_forms.htm