A corporation has a $50,000 Net Operating Loss (NOL) in the current year (Year 5). It had taxable income of $20,000 in Year 1, $10,000 in Year 2, and $30,000 in Year 3. How is the NOL treated?

Answer options:

Carry back to Year 1, then Year 2, then Year 3.

Carry back 2 years, forward 20.

Carry forward indefinitely, offsetting 100% of future taxable income.

Carry forward indefinitely, limited to 80% of taxable income in the carryforward year.

How to approach this question

Apply TCJA NOL rules: No carryback (except farms/insurance). Indefinite carryforward. 80% income limit.

Full Answer

D.Carry forward indefinitely, limited to 80% of taxable income in the carryforward year.✓ Correct

Under the TCJA, NOLs arising in tax years after 2017 generally cannot be carried back. They are carried forward indefinitely. However, the deduction in a carryforward year is limited to 80% of taxable income (determined without regard to the NOL deduction).

Common mistakes

Applying the old 2-back/20-forward rule or the 100% offset rule.

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