The New York State Department of Taxation and Finance has released another set of draft Article 9-A regulation amendments under New York State corporate tax reform, this time relating to the Prior Net Operating Loss Conversion (“PNOLC”) subtraction. Computation of the Prior Net Operating Loss Conversion (PNOLC) Subtraction (N.Y.S. Dep’t of Taxation & Fin., May 5, 2017). The PNOLC subtraction is an important aspect of corporate tax reform, since it is the only device by which a corporation may utilize its unabsorbed net operating losses (“NOLs”) incurred before the 2015 tax year (when corporate tax reform went into effect) as a deduction against its apportioned business income.
Basics of the PNOLC. The Tax Law provides considerable detail regarding the PNOLC calculation. A corporate taxpayer must first compute its PNOLC “subtraction pool,” which involves several steps but in essence is based on the tax value of its unabsorbed NOLs at the end of its “base year”—the taxpayer’s last taxable year beginning prior to 2015—multiplied by the taxpayer’s apportionment factor in that base year. The taxpayer then has the option of deducting 1/10 of the PNOLC subtraction pool annually (but not over more than 20 years) until fully utilized or else it can make a revocable election to deduct 1/2 of the subtraction pool in each of the years 2015 and 2016, respectively. The PNOLC subtraction is applied before claiming the regular NOL deduction for the tax year.
Among the issues covered by the draft regulations:
- Computation of the unabsorbed NOL. The draft regulations generally apply pre-2015 New York State NOL limitations in computing the amount of unabsorbed net operating losses available for the PNOLC subtraction pool. For example, the draft provides that New York State NOLs must be applied to reduce the taxpayer’s entire net income, even if the tax was paid on an alternative tax base in a given year. In addition, the draft applies both the pre-2015 “same source year” limitation and the limitation based on the amount deducted for federal purposes, two problematic limitations under the pre-2015 tax.
- Changes to a corporation’s unabsorbed NOL. In a key interpretation that would provide some finality to the PNOLC subtraction pool computation, the draft regulations provide that unabsorbed NOLs from pre-2015 years can only be changed within the normal three-year statute of limitations for the Article 9-A return on which a PNOLC subtraction is first claimed. After the expiration of that statute of limitations, any federal RARs—whether they increase or decrease federal taxable income—would have no effect on the subtraction pool calculation.
- Base year changes. Similarly, changes to the taxpayer’s base year apportionment factor— which is used to calculate its PNOLC subtraction pool available for carryforward—can only be made within the three-year statute of limitations for the base year.
- Changes in the NYS combined group. The draft regulations also provide detailed rules for computing the PNOLC subtraction where there are changes to the Article 9-A combined group, including when a member leaves the group. For instance, a departing member in a post-2014 tax year would be required to take its own PNOLC subtraction allotment (based on a percentage of the member’s subtraction pool), as well as its share of the combined group’s unused PNOLC carryforward, from the last year that it was part of the combined group.
- IRC § 381 limitations. In the case of a corporate acquisition, the acquiring corporation would be subject to the limitations under IRC § 381 regarding the unused PNOLC subtraction carryforward that the distributing or transferring corporation was subject to.
The draft PNOLC regulations provide much-needed clarity, including detailed examples, to this important part of corporate tax reform. Like the other tax reform regulations released by the Department since 2015, it is still in draft form and has not yet been formally proposed under the State Administrative Procedure Act. The Department is inviting comments by August 3, 2017.