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If B sells his stock for $300,000, he current-year basis under the statute of states, in efforts to address budgetary
will not report a $400,000 gain as limitation for assessment. woes and maximize revenue, have acted
would happen if the loss in excess of From Jeff Alberty, CPA, J.D., Denver to limit taxpayers’ ability to offset tax-
basis from closed statute years were able income with recognized losses. This
negative basis. Rather, B still reports item focuses on legislative developments
a $300,000 capital gain, and the re- State & Local Taxes in California, Illinois, and Kansas, as
maining $100,000 of losses in excess well as judicial decisions in Pennsylvania
of basis from closed statute years ef- Recent developments and New Jersey, that highlight imposed
fectively disappears due to the statute involving limitations to state limitations on NOL usage.
of limitation. NOL usage
As businesses continue to recover from Legislative changes
Unaddressed issues in the IRS the pandemic, many have experienced Using legislation to craft policy, Cali-
position dramatic economic difficulties that may fornia, Illinois, and Kansas have recently
The IRS has not provided guidance on ultimately manifest as operating losses. enacted state-specific limitations on
whether the basis adjustment occurs From a federal perspective, the law NOL usage.
in the year the loss should have been known as the Tax Cuts and Jobs Act California: In June 2020, California
reported or in the first tax year with an (TCJA), P.L. 115-97, in 2017 and the enacted legislation expected to raise $9.2
open statute of limitation. The timing of Coronavirus Aid, Relief, and Economic billion in taxes over a three-year period, in
when the adjustment to basis for losses Security (CARES) Act, P.L. 116-136, part by amending the California Revenue
in excess of basis from closed statute in 2020 significantly changed the his- and Taxation Code to suspend the use
years is included in the basis computa- toric treatment of net operating losses of NOLs for most taxpayers for tax years
tion affects the amount of beginning (NOLs) for federal income tax purposes. beginning in 2020, 2021, and 2022 (Ch.
basis in the open statute year. There can The TCJA provisions, specifically, limit 8 (A.B. 85), enacted June 29, 2020). This
be a computational difference in the allowable NOL deductions to 80% of is not the first time California has acted
beginning basis of the first open statute federal taxable income and lift the previ- to restrict the use of NOLs. California
year if nondeductible, noncapital expens- ously imposed 20-year limitation on suspended NOLs from 2008 to 2011,
es or nondividend distributions exceed carryovers. While the TCJA provisions during and after the Great Recession
the shareholder’s basis in a year closed by disallow NOL carrybacks, the CARES (Cal. Rev. & Tax. Code §§17276.21 and
statute after the initial year where there Act temporarily and retroactively allows 24416.21). Specifically, the 2020 legisla-
are losses in excess of basis in a closed NOLs incurred in tax years beginning in tion adds provisions for both corporate
statute year. 2018, 2019, or 2020 to be carried back and personal income tax purposes that
In addition, the IRS has not provided five years or carried forward indefinitely, together suspend the use of NOLs for
guidance on the treatment of non- at the taxpayer’s election. From a federal most California taxpayers for tax years
dividend distributions in excess of stock standpoint, the CARES Act change was beginning in 2020, 2021, and 2022 unless
basis that were not reported as capital intended to grant taxpayers a degree of they can qualify for limited small business
gains in a closed statute year. If non- relief from the economic difficulties cre- exceptions. The NOL suspension does
dividend distributions in excess of stock ated by the pandemic. not apply if a corporate taxpayer has less
basis were not reported as capital gains, As states have historically employed than $1 million of income subject to tax
then it is unclear whether there is a basis myriad ways to account for operat- for the tax year (Cal. Rev. & Tax. Code
adjustment similar to losses in excess of ing losses on a current basis, as well §24416.23(c)). Also, to compensate for
basis from closed statute years or if the as unique carryover and carryback the suspension, to the extent that the
statute of limitation on assessment pre- provisions, tracking the ability to utilize NOL utilization is denied by Cal. Rev. &
cludes any current-year basis adjustment. operating losses at a state level has long Tax. Code Section 24416.23, a corollary
The IRS has also not provided guid- been a complex and time-consuming en- extension of the NOL carryover period
ance on the treatment if a shareholder deavor. Over the past two years, as states is provided for each year of disallowance
fails to report the gain on loan repay- have reckoned with their own financial (Cal. Rev. & Tax. Code §24416.23(b)).
ment in a closed statute year when difficulties and decided whether and Similar rules apply for personal income
the loan is repaid in full in the closed how to conform to the many significant tax purposes (Cal. Rev. & Tax. Code
statute year. Once again, the require- tax provisions included in the TCJA §§17276(b) and (c)).
ment to report gain in a closed statute and the CARES Act, NOL treatment Illinois: Illinois enacted a fiscal 2022
year may preclude an adjustment to the has certainly not escaped notice. Some budget bill that includes a temporary

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