In general, is a net operating loss (NOL) allowed as a deuctible item for individuals in...

In general, is a net operating loss (NOL) allowed as a deuctible item for individuals in the following states? If so, what are the carryback and carryforward provisions?

a. South Carolina

b. New Jersey

c. Arizona

Expert Solution

Yes, a Net Operating Loss (NOL) is allowed as a deductile item for individuals in South Carolina, New Jersey & Arizona.

When a business reports operating expenses on its tax return that exceed its revenues, a net operating loss (NOL) has been created. An NOL can be used in some other tax reporting period as an offset to taxable income, which reduces the tax liability of the reporting entity. The basic rules for using an NOL are:

1. Carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver.

2. Carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years.

3. After 20 years, any remaining NOL is cancelled.

It makes financial sense to apply the NOL against the earliest periods possible, since the time value of money concept dictates that the tax savings in these periods is more valuable than for any tax savings in later periods.

If NOLs are being generated in multiple years, use them in the order the NOLs were generated. This means that the earliest NOL should be completely drawn down before the next oldest NOL is accessed. This approach reduces the risk that an NOL will be terminated by the 20-year rule noted earlier.

ekkarill92 answered 1 year ago

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