One of the changes in the Tax Cuts and Jobs Act (TCJA) is the handling of net operating loss deductions (NOLs).
Before the law went into effect this year, businesses were allowed to carry back NOLs two years, and carry forward 20 years to offset taxable income. Currently, the two-year carry back has been repealed, and businesses are no longer able to use NOLs to offset taxable income in the following years, according to The National Association of Home Builders' director of tax and trade policy analysis David Logan. Logan writes, "the NOL deduction is now limited to 80 percent of taxable income ... so business owners may no longer use NOLs to reduce tax liability to zero."
While a business should theoretically be able to use the aggregate value of net operating losses to offset tax liability in the future, some taxpayers and types of businesses may find that this is not the case. Capital-intensive startups, for instance, could post losses for years before finally making a profit. If the annual losses are large and, even in good times, the margins are small, one can imagine a situation in which the benefits are never fully realized. New active loss limitation rules enacted in the TCJA also erode the benefit of NOLs to upper-income taxpayers.