Pennsylvania provides guidance on the corporate NOL limitation
On Oct. 18, 2017, the Pennsylvania Supreme Court issued its decision in Nextel Communications Inc. v. Pennsylvania, holding that the flat $3 million cap on corporate net operating losses (NOLs), as applied to the taxpayer and the 2007 tax year at issue, violated the Uniformity Clause of the Pennsylvania Constitution. The court determined that severing only the flat-dollar limitation, as opposed to the cap or NOL deduction in their entirety, was the most appropriate remedy.
On Nov. 1, 2017, Nextel filed a Petition for Reargument with the Pennsylvania Supreme Court. Nextel also submitted an Application for Consolidation, requesting that its case be reheard alongside R.B. Alden Corp. v. Commonwealth. R.B Alden addresses, among other issues, the similar NOL limitation issue as in Nextel, but as applied to the 2006 tax year. It’s unclear whether the court will apply the same reasoning as Nextel to R.B. Alden, although the severance of the cap would allow for an unlimited NOL because no percentage-based limitation existed in 2006.
Notwithstanding the narrow scope of the court’s ruling in Nextel, the Pennsylvania Department of Revenue issued Corporate Tax Bulletin 2017-01. The bulletin instructs that the use of the flat cap shall be disallowed for the 2017 tax year. As a result, taxpayers may only apply NOLs to 30 percent of its taxable income. Moreover Pennsylvania House Bill 542, which was enacted on Oct. 30, 2017, repeals the flat-dollar NOL limitation for tax years 2018 and thereafter. However, the percentage cap is currently scheduled to increase to 35 percent for the 2018 tax year and 40 percent for 2019. Those changes to the NOL limitation for the 2017 and later tax years are fourth quarter events and should be taken into account for purposes of tax provisions, quarterly estimates, and extensions.
Please contact your tax advisor if you have open tax years that may be impacted by the Nextel decision or the department’s application of Nextel.