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TAX CLINIC

allow taxpayers to claim the greater of a
The recent legislative changes and court fixed-dollar amount or a relatively small
percentage of taxable income.
decisions in California, Illinois, Kansas, In 2017, the Pennsylvania Supreme
New Jersey, and Pennsylvania highlight Court addressed the constitutionality
of the limitation and struck down the
states’ continuing efforts to limit the use fixed-dollar limitation provision of the
of NOLs in efforts to raise revenue and NLC statute as applied to the chal-
balance their budgets in these lenging taxpayer during the 2007 tax
year (Nextel Communications of the Mid-
challenging times. Atlantic, Inc. v. Pennsylvania, 171 A.3d
682 (Pa. 2017)). In fashioning a remedy,
the court severed the fixed-dollar cap
limitation of its NOL carryover de- while Kansas NOLs incurred after Dec. from the NLC provision while retain-
duction (P.A. 102-0016 (S.B. 2017), 31, 2017, may now be carried forward ing the percentage limitation. Subse-
Laws 2021). Specifically, the legislation indefinitely, the federal 80% limitation quently, the Pennsylvania Department
limits C corporations to a deduction of added by the TCJA and the CARES of Revenue issued a bulletin clarifying
$100,000 of NOL carryforwards for Act’s temporary suspension of this limi- its policy to apply the remedy only on a
each tax year ending on or after Dec. 31, tation for NOLs carried forward to 2019 prospective basis, to tax years beginning
2021, and prior to Dec. 31, 2024. Like and 2020 will apply for Kansas income on or after Jan. 1, 2017 (Corporation
California, this is not Illinois’s first foray tax purposes. By disallowing NOLs Tax Bulletin 2018-02, Net Operating Loss
into restricting NOL usage as a means from being carried back and adopting Deduction (NOL): Application of Nextel
to raise tax revenue and close its budget the 80% TCJA limitation, Kansas’s Communications v. Commonwealth
gap. Previously, a similar limitation ap- legislation, like the legislation enacted by (May 10, 2018)).
plied for tax years generally ending in California and Illinois, imposes limits on In addressing the most recent chal-
2012 and 2013. If a corporation is af- taxpayers’ ability to use NOLs. lenge to the NLC statute during 2021,
fected by the limitation in a given year, an intermediate appellate court, the
that year will not be included in deter- Judicial decisions Commonwealth Court of Pennsylvania,
mining the 12-year carryforward period Courts in both Pennsylvania and New found that a taxpayer was not entitled
in which previously generated NOLs Jersey have recently considered disputes to a refund of CNIT paid for the 2014
must be used. regarding the appropriate usage of losses tax year when the taxpayer’s use of
Kansas: Kansas legislation enacted to offset income in computing the cor- NLCs was limited by the state’s percent-
in 2021 changes the state’s treatment porate income tax. age limitation for net loss deductions
of NOLs so that losses incurred in tax Pennsylvania: It is important to (Alcatel-Lucent USA Inc. v. Pennsylva-
years prior to Jan. 1, 2018, generally fol- recognize that challenges to Pennsylva- nia, No. 803 F.R. 2017 (Pa. Commw.
low the federal treatment, except that nia’s concept of an operating loss attri- Ct. 9/13/21)). In denying the refund,
the carryforward period is limited to 10 bute, the net loss carryover (NLC), have a three-judge panel found that the
years (Kan. S.B. 50, Laws 2021). This resulted in several significant judicial Pennsylvania Supreme Court’s decision
change, which was included with other decisions in recent years. Pennsylvania in Nextel does not require a retroactive
corporate income tax modifications as law generally allows corporate taxpayers elimination of the percentage limitation
part of a significant bill imposing a sales to carry forward unused prior net losses based on the taxpayer’s income. Instead,
tax collection and remittance require- to reduce the amount of taxable income the court ruled that prospective applica-
ment for remote sellers and marketplace subject to Pennsylvania corporate net tion of Nextel to the taxpayer’s facts did
facilitators, is the result of over three income tax (CNIT) in future years. not violate the Uniformity and Rem-
years of legislative efforts to respond to However, legislation enacted during an edies clauses of the Pennsylvania Con-
the increases in Kansas taxes due to fed- economic recession in the 1990s tem- stitution, or the Due Process and Equal
eral income tax changes resulting from porarily suspended the deduction before Protection clauses of the U.S. Constitu-
the TCJA. For NOLs incurred after reintroducing it with a fixed-dollar tion. Thus, Pennsylvania was free to
Dec. 31, 2017, Kansas NOL deductions limitation on the amount of net loss a apply its NLC percentage limitation.
will follow the federal treatment, but taxpayer could claim. Subsequently, the The next chapter in the NLC interpre-
may only be carried forward. Therefore, Legislature amended the legislation to tive saga is likely to come soon, with the

30 February 2022 The Tax Adviser