Pennsylvania appellate court strikes net loss carryover cap

Nov 25, 2019
Nov 25, 2019
0 min. read

After years of litigation, a Pennsylvania appellate court again determined that the flat dollar cap of the net loss carryover law violated the state’s uniformity clause and declared the cap void. The Pennsylvania Commonwealth Court ruled on Nov. 21, 2019 in General Motors Corp. v. Commonwealth and RB Alden Corp. v. Commonwealth that striking the cap on the carryover provision solved the uniformity issue. The court limited its ruling to the flat dollar cap and let the rest of the net operating loss law stand. The ruling allows the taxpayers to claim an unlimited net operation loss deductions for the years at issue.

This case represents the latest in a series of challenges to limits on net operating loss carryovers set forth in Pennsylvania law. For tax years before 2007, Pennsylvania imposed an annual limit of $2 million on the application of net loss carryovers.

Beginning in 2007, businesses could utilize a net loss carryforward up to 12.5% of its state taxable income or $3 million, whichever is greater. In 2017, the Pennsylvania Supreme Court held in Nextel  that the $3 million flat cap violated the uniformity clause. The court’s remedy was to strike the flat cap form the law, but the 12.5% of taxable income limit was retained.

The current cases of General Motors and RB Alden Corp. pertained to tax years prior to 2007, which only had a flat cap of $2 million. Both the state and the taxpayers agreed that given the Nextel  decision, the flat cap violated the uniformity clause. The question before the court was the appropriate remedy. Taxpayers argued that the cap provision should be stricken from the law allowing the unlimited application of net operating loss carryovers. The state argued that the entire net loss carryover law should be voided – meaning that no one is entitled to any carryover. The court sided with the taxpayers.


The Pennsylvania Department of Revenue is likely to appeal the court’s decisions based on its belief that the legislature never intended to allow unlimited net operating loss carryovers. In the meantime, all companies doing business in Pennsylvania should examine their net operating losses for all open years. To the extent companies were limiting their carryovers it may be possible to utilize additional losses. For our previous coverage on these issues, please read our alert, Pennsylvania NOL cap appealed to U.S. Supreme Court.

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