With states facing unprecedented gaps between budgets and revenue, many jurisdictions are looking at their tax codes to close the gap. Among the measures some states are considering is the suspension or elimination of net operating loss ("NOL") carryforwards, NOL carrybacks, and other tax credits. States that have considered such limitations include Arizona, California, Colorado, Georgia, Idaho, Indiana, and Virginia.
In some instances, legislation seeks to phase out the tax credits, while in other cases the state seeks to eliminate or suspend tax credits immediately. The long-term consequences of eliminating or limiting income tax credits remain to be seen.
Limitations on Use of Net Operating Losses
For federal tax purposes, NOLs generally may be carried back (currently two years) or forward (currently 20 years) pursuant to I.R.C. § 172. Federal NOLs survive corporate acquisitions (e.g., a reorganization) under the circumstances specified in I.R.C. § 381 and are subject to limitations on the use following an "ownership change" (generally 50 percent) per I.R.C. § 382. Many states have NOL rules that differ from the federal tax NOL rules. The differences are becoming more prevalent as states take action to limit NOL carrybacks and carryforwards.
During the 2010 legislative session, several states have enacted or introduced legislation impacting the use of state NOLs. Most of these bills impose additional limitations on use of NOLs for state income tax purposes.
Colorado HB 1199—Enacted
The Governor of Colorado recently signed into law HB 1199, which limits the use of NOLs to $250,000 annually for the next three years, beginning January 1, 2011. Taxpayers may add an additional year in carryforwards for each year that they are affected by this new limit and may accrue interest on these additional carryforwards at 3.25 percent.
Idaho HB 381—Enacted
The Idaho Governor signed into law HB 381, which amends existing law to clarify the definition of "net operating loss" and to provide that NOLs of a corporation will survive a merger subject to certain conditions, effective January 1, 2010. Prior to this amendment, Idaho tax statutes were silent on the survival of NOLs after a merged corporation ceases to exist. The Idaho State Tax Commission's long-standing practice and administrative rule, however, allowed the survival of NOLs by applying federal law to the Idaho tax statutes. The bill codifies the existing administrative rule and practice of the Idaho State Tax Commission regarding NOL carryovers of merged corporations. The bill permits an NOL carryover to survive a merger subject to the limitations of IRC §§ 381 and 382 and to apportionment rules applicable to multistate income.
California AB 1936—Introduced
If passed, AB 1936 will disallow the carryback of NOLs by individual and corporate taxpayers. Existing law allows deductions for specified NOLs incurred in years beginning on or after January 1, 2011, to be carried back two years (on a reduced basis for NOLs incurred in 2011 and 2012) and carried forward 20 years (up from 10 years). A provision similar to AB 1936 disallowing NOL carrybacks is included in AB 2100.
Indiana S 236—Passed Senate and Referred to House
S 236 amends Ind. Code §§ 6-3-2-2.5(f) and 6-3-2-2.6(f), limiting NOL carrybacks to two years for taxpayers instead of the five years allowed for NOLs incurred in tax years 2008 and 2009 pursuant to IRC § 172(b)(1)(H). If enacted, the bill will be effective as of November 6, 2009.
Elimination or Limitation of Other Tax Credits
The following are summaries of proposed legislation seeking to eliminate or limit various other tax credits.
Arizona House Bill 2160
Arizona HB 2160 would repeal the Agricultural Pollution Control Tax Credits found in Ariz. Rev. Stat. §§ 43-1081.01 and 43-1170.01, respectively, for both corporations and individuals. The credits were provided to taxpayers involved in the commercial production of livestock; livestock products; and agricultural, horticultural, viticultural, or floricultural crops or products for expenses incurred during the taxable year to purchase tangible personal property to control or prevent pollution. Both credits have been available to taxpayers for more than a decade. Similarly, HB 2160 would repeal the credit provided for expenses incurred during the taxable year to purchase and install agricultural water conservation systems in Arizona. The Agricultural Water Conservation System Credit was enacted in 1994. An amended version of HB 2160 unanimously passed the tax credit review committee on February 8.
California Senate Bill 1316
California SB 1316 is a place-holder bill intended to provide California with the option to phase out either personal or corporate income tax credits. SB 1316 was introduced on February 19 and has not been amended to provide any specific tax credit phase-outs.
Georgia House Bill 1067
Rather than eliminating certain tax credits, HB 1067 sought to impose limitations on them. Under HB 1067, if an income tax credit contained a limitation on the aggregate amount of credit that could be taken during a taxable year, that credit would have been subject to an additional 15 percent reduction in the aggregate amount of available credit. HB 1067 would have applied to any tax credit that was enacted, reenacted, or extended on or after January 1, 2007. The Port Activity Tax Credit (O.C.G.A. § 48-7-40.15A) enacted during the 2009 legislative session is an example of a credit that would have been affected. HB 1067 died in committee.
Virginia Senate Bill 705
SB 705, defeated on February 26, 2010, would have reduced the Land Preservation Tax Credit provided in Va. Code Ann. § 58.1-512 to individuals and corporations from $100,000 to $50,000. Currently, taxpayers donating land or an interest in land located in Virginia for agricultural or forestal use, or for a number of other specific beneficial purposes, may receive an income tax credit up to $100,000 in tax years 2011 and later. SB 705 was defeated in the finance committee.