Will Pre-2018 NOLs be Allowed in Full?
The new tax law has a limit on business losses called the Excess Business Law (EBL) provision. Under the old law, farmers who received an applicable subsidy from USDA also had an excess farm loss rule. That has been repealed and replaced with the EBL rules. Farmers will be required to accumulate all of their losses on their tax return and if the total net loss is greater than $250,000 ($500,000 for married couples), the excess is not allowed and will be carried forward to the following year as part of the Net Operating Loss (NOL).
We assumed that all pre-2018 NOLs would be allowed to offset 100% of taxable income for 2018 and beyond. However, what if the new law treats NOLs as being subject to the EBL rules even for pre-2018 NOLs. In this case, the NOL carryover would be allowed to fully offset any business income, but if the remaining loss exceeded the limits, then that would be the final loss allowed and therefore, much more income might be subject to income tax.
Let’s look at some examples:
Pat, a single farmer, has a 2017 NOL of $1 million. During 2018, he has net farm income of $500,000. The NOL carryover is allowed to fully offset the farm income in 2018. However, Pat will be subject to self-employment tax on the farm income. Pat would still have $500,000 left to offset income in 2019.
Now, let’s assume that Pat incurs a farm loss of $500,000 in 2018 and also has a long-term capital gain from a stock sale of $1 million. If the NOL is not treated as part of the EBL provisions, Pat will be able to take $250,000 of the farm loss and offset the capital gains income plus $750,000 of the NOL carryover is allowed to fully offset the remaining capital gain and no tax will be owed. Pat would then have $500,000 NOL carryover to 2019.
Finally, let’s assume that the NOL carryover is subject to the EBL rules. In this case, Pat can only offset $250,000 of the capital gains resulting in tax on $750,000 of income. The 2017 $ 1 million carryover plus the $250,000 EBL will be carried forward to 2019.
As of yet, we have not gotten final guidance from the IRS on how this will be calculated. However, intuitively, it seems that NOLs could very well be part of the EBL rules since the only way you can have an NOL is for there to be business losses. This is another reason why we don’t want NOLs under the new law.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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