Identifies issues under 2017 tax legislation
Members of the Senate Finance Committee sent a letter to the Treasury Department and the IRS addressing issues related to the 2017 tax legislation known as the Tax Cuts and Jobs Act or TCJA (Pub. L. No. 115-97, enacted Dec. 22, 2017). Most of the Republican members of the Senate Finance Committee signed the letter, writing to clarify the legislative intent underlying certain provisions of the TCJA.
The letter identifies three provisions of the TCJA that the committee members have concluded require technical correction: (1) the effective date of net operating loss (NOL) rules, (2) depreciation rules applicable of real property meeting the new definition “qualified improvement property,” and (3) the deductibility of legal fees in pursuing sexual harassment cases. This Alert addresses the first of these three – the NOL rules.
The Senate Finance Committee letter requests that Treasury and IRS guidance to be issued under these provisions be consistent with the legislative intent clarified in the letter. The letter also notes that the Committee is reviewing the TCJA to identify other areas where technical corrections are necessary, and will thereafter propose technical corrections legislation.
Net operating loss carrybacks
The TCJA made a number of changes to the NOL rules. One was that it eliminated NOL carrybacks – the use of a current year NOL to reduce a prior year’s taxable income and generating a potential refund. The Tax Code states that no carryback is available for any NOL arising in a taxable year ending after Dec. 31, 2017.
This effective date is disappointing for fiscal year corporations reporting an NOL for a tax year that includes Dec. 31, 2107 and ends after Dec. 31, 2017. For example, under a plain reading of the statute, a corporate taxpayer projecting an NOL for a fiscal year ending March 31, 2018 appears subject to the NOL carryback disallowance because the tax year ends after Dec. 31, 2017.
The TCJA’s legislative history contains an inaccurate description of the effective dates in the bill originally passed by the Senate. That description, like the Senate Finance Committee letter, appears to be indicative of legislative intent but conflicts with the text of the law. Our prior alert discusses the TCJA’s NOL provisions in further detail.
Absent a technical correction or other authorization of carryback claims, taxpayers should follow the TCJA’s clear effective date language, which plainly states that the law is effective for NOLs arising in tax years ending after Dec. 31, 2017. The Senate Finance Committee letter, however, provides hope to fiscal year taxpayers seeking to carry back NOLs from years beginning in calendar 2017, and indicates that authorization to claim those carrybacks may be forthcoming.