In a perfect world, states that adopt federal taxable income as the starting point for calculating the corporate income tax base would make it a simple task for taxpayers and tax return preparers to determine, track and apply net operating losses (NOLs). This could be achieved by following the federal NOL rules under section 172 without modification on a pre-apportionment basis, thereby limiting the use of federal loss to federal income and exercising restraint in the introduction of complex state-specific calculations. Unfortunately, the world of state corporate income tax is far from perfect, and many states have diverged from this roadmap for simplicity. Maryland, in particular, is noteworthy for its complicated NOL and net addition modification (NAM) adjustment rules.
In this article, first published in Tax Analyst's State Tax Notes, Brian Kirkell discusses how Maryland's NOL rules stand out from the wide variety of state income tax calculations as overly complex and subjecting taxpayers to a high risk of error. Providing evidence of such complexities, the authors conclude that while a detailed exploration of Maryland's approach to NOLs and the NAM adjustment can make the state's system less daunting, the potentially high cost of compliance and the issues and risks resulting from those calculations remain unchecked. As a result, Kirkell suggests it may be time for Maryland to try a new recipe.