New York’s NOL Dilemma – The Not So Tender Trap
By Thomas Corrie, New York Metro Leader - State & Local Tax
Normally, under the provisions of the Internal Revenue Code, no carrybacks of NOLs are permitted. But, under the provisions of The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), federal net operating losses (NOLs) arising in 2018, 2019, and 2020 were permitted to be carried back to the five previous tax years. New York State decoupled from the NOL provisions of the CARES Act and instead required that, for purposes of the state, NOLs be computed as if the CARES Act did not exist. As a result, under New York law, a taxpayer’s NOL deduction was limited to the lesser of:
- The taxpayer’s federal NOL deduction computed using the rules in place without regard to the changes made by the CARES Act, or
- The taxpayer’s federal taxable income (without the NOL deduction) using the rules in place without regard to the changes made by the CARES Act.
The NOL provisions of the CARES Act do not apply at the state or Federal level for years beginning on or after January 1, 2022. Now that New York’s treatment of NOLs has recoupled with the federal provisions, a potential taxpayer problem becomes evident. A taxpayer that took advantage of the federal carryback provisions of the CARES Act may be “trapped” considering New York’s limitations on the amount of a taxpayer’s NOL eligible for deduction (the lesser of the federal NOL deduction or federal taxable income). In this situation, the NOLs that were carried back were fully used for federal purposes, but those NOLS were not permitted to be carried back in a similar fashion since New York did not follow the provisions of the CARES Act. Accordingly, the NOLs still exist for state purposes but not for federal purposes. Given New York’s limitations on NOLs that tie into the federal numbers, a not-so-tender trap arises.
As of the current date, New York has not issued any guidance with respect to this issue. Given the potential extent of the problem, perhaps it is time for the Department of Taxation and Finance to step up to the plate and deliver clarity.
