TAXFAX

TAXFAX

TAXFAX EDITOR George W. Benson McDermott Will & Emery LLP

TAXFAX Guest Writers Daniel R. Schultz Cooperative Consulting, LLC

Limitations on Excess Losses from Farming Temporarily Replaced by Limitations on Excess Business Losses of Noncorporate Taxpayers

By George W. Benson

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) temporarily suspended Section 461(j), a special rule limiting the use of “excess farm losses” in the case of certain wealthy individuals, and temporarily replaced it with Section 461(l), a broader limitation on the excess business losses of all sorts (including farming losses) of certain noncorporate taxpayers. The temporary suspension and replacement is for taxable years beginning after December 31, 2017 and before January 1, 2026.

Section 461(j) is a rather narrow provision targeting only large farming losses of wealthy individuals receiving farm subsidies. It was originally enacted as part of the Food, Conservation and Energy Act of 2008. The Senate Finance Committee Report (S. Rep. No. 110-206, 110 Cong., 1st Sess. 2007) stated:

“The Committee believes that taxpayers receiving government assistance through payment programs and loan programs should not be allowed to claim unlimited amounts of losses from farming activities.” (at 76).

Section 461(j) limits the use of “excess farm losses” by certain taxpayers (other than C corporations) that receive any “applicable subsidy” for a year. For this purpose, “applicable subsidy” is defined as any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act (or any payment elected to be received in lieu of any such payment) or any Commodity Credit

Corporation loan. “Excess farm losses” is defined as the excess of deductions

Christopher R. Duggan Dorsey & Whitney LLP

Teresa H. Castanias, CPA

for a year attributable to farming businesses over the sum of the aggregate gross income of the taxpayer for the year plus a “threshold amount.” The threshold amount is the greater of (i) $300,000 ($150,000 in the case of married individuals filing separately) or (ii) the taxpayer’s total farming gross receipts for the prior five years over deductible farm expenses for the prior five years. Losses disallowed under Section 461(j) are treated as deductions of the taxpayer attributable to farming in the subsequent year.

Interestingly, Section 461(j) contains a broader than usual definition of farming. For persons engaged in farming with respect to a commodity, the definition sweeps in “any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity).” If the farmer is a member of a cooperative, any such trade or business of the cooperative “shall be treated as the trade or business of the taxpayer.” The Conference Committee Report (H.R. Conf. Rep. No. 110- 627, 110 Cong., 2d Sess. 2008) provided further explanation:

“The farming activities of a cooperative are attributed to each member for purposes of this rule. Thus, a member of a cooperative who raises a commodity and sells it to the cooperative for processing is considered to

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be the processor of such commodity. In this case, patronage dividends received from a cooperative that is engaged in a farming business are considered to be income from a farming business for purposes of this provision.” (at 1084).

New Section 461(l) is not limited to farming. Nor is it limited to taxpayers that receive “applicable subsidies.” It limits the deduction of “excess businesses losses” of taxpayers other than C corporations carrying on any kinds of trades or businesses (including farming).

For purposes of Section 461(l), an “excess business loss” is the excess of (a) the aggregate deductions of the taxpayer for the year attributable to trades or businesses of such taxpayer, over (b) the sum of (i) the aggregate gross income or gain of the taxpayer for the taxable year from such trades or businesses plus (ii) $250,000 ($500,000 in the case of a married couple filing a joint return), adjusted for inflation. There is no adjustment for profits earned in prior years as there is in Section 461(j) and no limitation on its applicability to taxpayers receiving “applicable subsidies.”

Excess losses are treated as net operating loss carryovers under Section 172. As a consequence, the new 80% limitation on the use of net operating loss carryover deductions applies. Section 461(l) (2) specifically provides that the disallowed losses “shall be treated as a net operating loss carryover to the following taxable year under section 172.” This is in contrast with Section 461(j) which provides that excess farm losses disallowed under Section 461(j) are treated as deductions “of the taxpayer attributable to farming businesses in the next taxable year,” not as Section 172 net operating loss carryovers. Does the language of Section 461(j) override the special two-year carryback rule that continues in Section 172(b)(1)(B) for farming losses?

Taxpayers with farming businesses that historically were not subject to Section 461(j) may find themselves subject to Section 461(l).

The limitations in both sections are in addition to all other limitations upon the use of losses contained in the Code. The Code specifies that Section 461(j) is applied before the application of Section 469 (the passive loss rules). For new Section 461(l), the Code specifies that it applies after the application of Section 469.

The IRS has never gotten around to promulgating regulations under Section 461(j). The Conference Report does contain several examples of its intended application.

Like most provisions in the TCJA, new Section 461(j) presents a variety of questions as to how

it works and how it relates to other provisions in the Code. The IRS has announced that there is a project underway to write regulations for Section 461(l).

New Tax Act Makes Changes to the Section 451 Income Recognition Rules

By Dan Schultz

The new Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017 made significant revisions to the rules under Section 451 that determine the tax year in which income is recognized by accrual basis taxpayers. Section 451 was restructured to include the new recognition rules as Sections 451(b) and 451(c).

Background – pre-TCJA rules The general rule for determining when accrual method taxpayers must recognize and include items of income in taxable income is known as the “all-events test.” The all-events test provides that under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.

The all-events test, as applied in practice, is stated as: “All the events that fix the right to receive income occur when (1) the income is earned, i.e., the required performance takes place, (2) payment is due, or (3) payment is made, whichever happens first.” Thus, accrual basis taxpayers who earned an item of income by providing the required goods or performing the required services in a tax year preceding the tax year in which payment was due under the contract, or payment was received in cash or cash equivalents, were required to recognize and pay tax on the income in the earlier tax year in which it was earned, but prior to receiving payment in cash.

In the opposite situation, where advance payments were received or due and payable under the terms of the contract in a tax year or years preceding the tax year in which the item of income was earned, accrual basis taxpayers were required under the all-events test to recognize the advance payments as taxable income in a tax year prior to the year in which the income was actually earned. Because this could result in a significant mismatch in the timing of the taxpayer’s recognition of income versus the tax deductions for expenses incurred in earning such income, the IRS provided an elective deferral method of accounting for advance payments for goods, services, and other specified items, which is currently set forth in Revenue Procedure 2004-34. The safe harbor of Revenue Procedure 2004-34 allows taxpayers

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a one-year deferral of advance payments to the extent not earned in the year of receipt.

TCJA Revisions Act Section 13221(a) adds new Section 451(b), titled “Inclusion not later than for financial accounting purposes,” which codifies the allevents test but adds a fourth component to the test by requiring that an item of income must be recognized no later than the tax year in which the item is taken into account as revenue in an applicable financial statement. Section 451(b) also provides that in the case of a contract with multiple performance obligations, the taxpayer can allocate the transaction price in accordance with the allocation made in the taxpayer’s applicable financial statement.

Act Section 13221(b) adds new Section 451(c), “Treatment of advance payments,” which codifies the deferral method of accounting provided for in Revenue Procedure 2004-34, for advance payments for goods, services and other specified items. New Section 451(c) thus allows accrual method taxpayers to elect to defer the inclusion of income associated with certain advance payments until the end of the tax year following the tax year of receipt, as long as the revenue is also deferred for financial statement purposes. In the case of advance payments received for a combination of services, goods, or other specified items, the new provision allows the taxpayer to allocate the transaction price in accordance with the allocation made in the taxpayer’s applicable financial statement.

The application of the new rules is a change in method of accounting for purposes of Section 481. The new rules generally apply to tax years beginning after December 31, 2017.

Observation: With some exceptions, the new financial statement conformity requirement is not intended to prevent the use of special methods of accounting provided elsewhere in the Code, e.g., the installment method under Section 453 or longterm contract methods under Section 460 can still be used. The IRS has announced that it intends to issue proposed regulations providing that accrued market discount is not covered by the new rules. Notice 2018-80 (September 27, 2018). Observation: The new provisions do not revise the rules for determining when an item of income is realized (as opposed to recognized) for Federal income tax purposes. Thus, recognition of income is not required in situations where the Federal income tax realization event has not yet occurred. For example, the new rules do not require the recharacterization of a transaction from a sale to a lease, or vice versa, to conform to how the

transaction is reported in the applicable financial statement. The IRS and Treasury are currently in the process of issuing guidance for the implementation of these new rules, including the procedures for any required accounting method changes.

Pending issuance of guidance under Section 451(c), the IRS has announced that “taxpayers may continue to rely on Rev. Proc. 2004-34 for the treatment of advance payments.” Notice 2018-35 (April 12, 2018). In addition, the IRS has issued a notice that it proposes to remove Treas. Reg. § 1.451-5, an alternative set of rules that some taxpayers used to defer advance payments. In the notice the IRS stated that “[n]ew section 451(c) and its election to defer advance payments override the deterral method provided by § 1.451-5.” See REG- 104872-18 (October 15, 2018).

Caveat: The scope of this article is limited to providing an overview of the revisions made to Section 451 by the new TCJA, and to serve as an orientation to these new rules.

Adding financial statement conformity to the allevents test adds a new level of complexity to both tax compliance and financial accounting for income taxes. There are also a number of exceptions in the new rules involving various types of income to become aware of and consider. We can only hope the IRS will be able to provide timely guidance to ease the transition.

Country Club Denied Deduction for Loss Generated by a Consistently Unprofitable Nonmember Activity

By George W. Benson

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) contains one provision that promises to be particularly troublesome for organizations that are tax exempt under one of the subsections of Section 501(c).

Tax exempt organizations are taxed on their unrelated business income. Historically, tax exempt organizations with income from some unrelated activities and losses from others were allowed to offset the income and losses. They were taxed only on net unrelated business income.

This has now changed. New Section 512(a)(6) prohibits such netting. The Conference Committee Report that accompanied the TCJA states:

“The result of the provision is that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same year. The provision generally does not, however, prevent an organization from using a deduction from

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one taxable year to offset income from the same unrelated trade or business activity in another taxable year, where appropriate.”

A recent decision of the Sixth Circuit Court of Appeals illustrates why this change was made.

Losantiville County Club (the “Club”), a county club exempt under Section 501(c)(7) that includes an 18-hole golf course, a swimming pool, tennis courts, dining facilities and meeting and reception rooms, for many years hosted nonmember events “to generate additional revenue and attract new members.” The Club’s nonmember events consistently resulted in net losses. While gross revenue significantly exceeded direct expenses, it did not exceed direct expenses and an allocable share of indirect expenses. In fact, the Club lost money on nonmember events every year from 2002 through 2015.

The indirect expenses allocated to nonmember events included a portion of salaries and wages, employee benefits, repairs, depreciation, grounds maintenance, supplies, and general and administrative expenses. Expenses were allocated using a “gross-to-gross allocation method” – the Club used the “ratio of nonmember sales to total sales to determine what portion of indirect expenses was attributable to nonmember sales.”

On its tax return, the Club netted the losses against otherwise taxable investment income (which for clubs exempt under Section 501(c)(7) is treated as unrelated business income). This totally eliminated the Club’s unrelated business income for the years at issue.

In an audit of the Club’s 2010, 2011 and 2012 tax returns, the IRS asserted that the Club did not intend to profit from the nonmember activities and thus was not entitled to deduct the losses as trade or business expenses under Section 162. The IRS concluded that the Club owed tax on its investment income. It also asserted the 20% accuracy-related penalty.

The Tax Court sided with the IRS. Losantiville Country Club v. Commissioner, 114 TCM 198 (2017). The Club appealed. The Sixth Circuit affirmed the conclusions of the Tax Court, though it corrected some of the Tax Court’s reasoning. Losantiville Country Club v. United States, No. 17- 2394 (6 th Cir. 2018).

The Sixth Circuit opinion focuses on whether the Club had a profit motive for the nonmember activities. It was certainly economically rational for the Club to carry on the activities, even though they resulted in losses, so long as the activities generated revenue in excess of direct expenses, which they did consistently from 2002-2015. The nonmember activities helped the Club partially recover overhead costs that would otherwise have

had to be recovered from members through higher dues and charges.

However, this was not enough for the activity to rise to the level of a trade or business. The Club needed to establish that it intended to earn a profit. The Sixth Circuit observed that, where a taxpayer has consistently incurred losses in an activity, a heavy burden is placed on the taxpayer to demonstrate a profit motive. The Sixth Circuit concluded that the Club “never adduced any evidence that it attempted to stem its flood of losses, or that it expected to eventually profit.”

The Sixth Circuit then proceeded to affirm the imposition of accuracy-related penalties, rejecting the Club’s argument that it relied on a tax professional (“The record reflects that Losantiville conveyed its own opinions about the club’s tax obligations to its accountants, not that the accountants ever evaluated Losantiville’s position.”) and its argument of legal justification (“in contrast, Losantiville marshalled virtually no evidence supporting its arguments for underpayment even under its argument for a novel application of Portland Golf Club.”).

The IRS has begun the rule making process for new Section 512(a)(6). See, Notice 2018-67 (August 21, 2018), setting forth some interim guidance and transition rules and soliciting comments.

One portion of the regulations might have relevance for cooperatives. Notice 2018-67 states that regulations will contain guidance as to how expenses should be allocated between an exempt organization’s exempt function and its various trades or businesses subject to the unrelated business tax. In particular, the IRS is concerned with “dual use facilities,” i.e., facilities used in two or more trades or businesses or in the exempt function and one or more trade or business.

“The Treasury Department and the IRS currently have an item on the Priority Guidance Plan regarding methods of allocating expenses relating to dual use facilities. The allocation issues under § 512(a)(1) [between exempt functions and unrelated business activities] are also relevant under § 512(a)(6) because an exempt organization with more than one unrelated trade or business must not only allocate indirect expenses among exempt and taxable activities as described in § 1.512(a)- 1(c) and (d) but also among separate unrelated trades or businesses. The Treasury Department and the IRS therefore are considering modifying the underlying reasonable allocation method in § 1.512(a)-1(c) and providing specific standards for allocating expenses relating to dual use facilities and the rules under § 512(a)(6).” (Section 3.04).

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It is not clear how the new rules will apply to social clubs like the Club. Notice 2018-67 states that “a social club’s nonmember income is treated as gross income from an unrelated trade or business under § 512(a)(3)” (which appears to be a departure from what the IRS argued in Losantiville). The Notice then observes “a social club that receives nonmember income from multiple sources, such as from a dining facility and from a retail store, would have more than one unrelated trade or business and therefore be subject to the requirement of § 512(a)(6).” But can a social club still net nonmember losses (assuming the trade or business test is met) against investment income? This is not completely clear since Section 512(a)(6), as written, applies just to netting between separate trades or businesses. Having said that, the IRS will likely be tempted to try to classify investment income as income from a trade or business for this purpose. The Notice requests “comments regarding how these exempt organizations’ investment income should be treated for purposes of § 512(a)(6).” See, Section 7.

Relevance for cooperatives. It would be a stretch for the IRS to attempt to use Losantiville to characterize nonmember/ nonpatronage activities of most cooperatives as not amounting to a trade or business.

Subchapter T cooperatives (including socalled “exempt” Section 521 cooperatives) are not subject to the unrelated business income tax and thus are not covered by Section 512(a)(6). So upcoming regulations under that section will not be directly applicable to cooperatives. However, that does not mean that advisors to cooperatives can simply ignore developments in this area. For instance, many cooperatives have dual use facilities, i.e., facilities used in both patronage and nonmember/nonpatronage activities. There is little guidance as to how expenses related to such facilities should be allocated by cooperatives. What future regulations promulgated under Section 512(a)(6) may provide with respect to dual use facilities may provide a reference point for judging the reasonableness of a cooperative’s treatment of expenses related to dual use facilities. Interim Guidance on the Treatment of Meals Provided in Conjunction with Entertainment

By George W. Benson

The Fall, 2018 TAXFAX Column included an article describing the changes made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) to the tax treatment of meals and entertainment. That article indicated that many grey areas were created by the TCJA, including when a meal might be considered

entertainment.

In early October, the IRS released Notice 2018- 76 announcing that the Treasury and the IRS intend to issue proposed regulations under Section 274 “which will include guidance on the deductibility of expenses for certain business meals.” The Notice went on to provide that until the proposed regulations are final, a taxpayer “may deduct 50 percent of an otherwise allowable business meal expense if: 1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances;

3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and

5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

The Notice contains an example of a taxpayer who invites a business contact to a baseball game and buys tickets, hot dogs and drinks. The tickets are nondeductible entertainment expenses, but 50% of the cost of the hot dogs and drinks may be deducted as a meals expense. The Notice contains two other examples involving attendance at a basketball game. In one, the cost of tickets for a suite include food and beverages. Because the cost of the food and beverages is not separately stated on the invoice for the suite tickets, the entire expense is a nondeductible entertainment expense. In the other, the cost of food and beverages is separately stated on the invoice for the suite tickets. As a consequence, 50% of the cost of food and beverages can be deducted as a meals expense.

IRS Rules that Multi-Stakeholder Cooperative with Nonproducer Member Class Does Not Qualify as Section 521 Tax-Exempt Farmers’ Cooperative

By Christopher R. DugganIn PLR 201835010 (Aug. 31, 2018), the IRS held that

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a cooperative that facilitated sales of farm products between producers and consumers failed to qualify as a tax-exempt farmers’ cooperative under Section 521 of the Code. The ruling signifies that no cooperative that includes nonproducer memberpatrons qualifies as a farmers’ cooperative under Code Section 521.

The cooperative’s articles of incorporation state that it was formed for various lofty purposes, such as creating a cooperative “rooted in local food production” which “strengthens the physical and financial wellbeing of the community” and “empower[ing] the community to educate itself.” The most substantive purpose is “to provide local food producers and consumers a year-round market for buying and selling goods and services according to consumer cooperative and financially sound principles.”

The cooperative pursued these purposes by operating an on-line marketplace – a “local food hub” – that advertised products offered by local producer members. Consumer members could order these products through the cooperative’s Internet site but the actual exchange transaction took place between the consumer and producer at a specified location. The products not only included such items as fruits, vegetables, fish and honey, but also processed or imported items such as tea, chocolate and ice cream.

The ruling states that the cooperative “function[ed] like a food co-op” and the majority of its members were consumers rather than producers. The cooperative’s income apparently arose solely from an annual membership fee collected from members. The ruling does not indicate that the membership fee differed for consumer versus producer members, though producer members undoubtedly received more economic benefits than consumer members from the cooperative.

The provisions on cooperative operation in the cooperative’s governing documents appear to have been drafted by a non-specialist in cooperative tax law. The governing documents provide that the cooperative shall operate “as nearly as possible at cost” for the mutual benefit of its members, provided that the Board of Directors in its discretion may set aside and accumulate reasonable reserves. If amounts in excess of reasonable reserves are received, such amounts “shall be accumulated in a surplus fund.” Some or all of the surplus fund “shall be distributed to members as determined by the Board.” Such distributions would be unlikely to qualify as valid patronage dividends under Subchapter T because of lack of a pre-existing obligation.

The cooperative’s income statement, moreover, appears to have been created by a non-accountant. The ruling states that the income statement

“includes sales which is offset by cost of goods sold,” a puzzling sentence because producers made product sales, not the cooperative.

The cooperative appears to have been intended as a multi-stakeholder cooperative with a consumer member class and a producer member class. The cooperative was not carefully organized, however, and lacked standard patronage refund and consent provisions and any methodology for dividing cooperative income between the producer and consumer classes.

The ruling rightly holds that the cooperative failed to qualify as a Section 521 cooperative. The fundamental problem, in the IRS’ view, was that the cooperative included nonproducer members, though the ruling fails to explain precisely why a Section 521 cooperative with producer members cannot create a consumer member class to share in net income. The obstacle, I believe, is that Section 521 requires a cooperative to market the products of and/or supply equipment to farmerproducers “at cost” after deducting “necessary expenses,” which precludes any diversion of income to nonproducer members. Code § 521(b) (1); Treas. Reg. § 1.521(a)(1) and (b). The ruling also holds that the cooperative’s mere facilitation of sale exchanges, without acting as middleman, failed to satisfy Section 521 requirements, which it appears to hold require physical participation in marketing for or selling supplies and equipment to producers. The ruling does not explain why Internet advertising of producer products fails to qualify as “marketing” under Code Section 521, although the language of Section 521 implies that a Section 521 cooperative must actually sell producer products in order to “turn[] back the proceeds of sales” less necessary expenses to the producers.

In short, the ruling discourages attempts by cooperatives that distribute any income to nonproducer members to qualify under Section 521.

Modified Net Operating Loss Deduction under TCJA

By Teree Castanias

The Tax Cuts and Jobs Act of 2017 (TCJA) limits the net operating loss (NOL) deduction for a given tax year to 80% of taxable income, effective with respect to losses arising in tax years beginning after December 31, 2017. This limitation is similar to the 90% limitation for NOLs that was in the corporate alternative minimum tax (AMT) regime. The corporate AMT was repealed in the new tax law.

The new law requires corporations to track NOLs arising in tax years beginning (1) on or before December 31, 2017, and (2) after December 31, 2017, separately as only the latter category of NOLs is subject to the 80% limitation.

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How this limitation will be applied when a applies to losses arising in tax years beginning taxpayer has both types of NOLs is not completely

By Barbara after A. Wech

December 31, 2017 whereas the statutory clear. The issue is when is the 80% limitation language regarding the indefinite carryover and computed for purposes of applying the limitation the elimination (for most taxpayers) of the NOL to a particular tax year. Assume a calendar year carryback applies to losses arising in tax years taxpayer with $90 of NOLs carried over from its ending after December 31, 2017. So, under the 2017 year (not 80% limited) and $10 of NOLs statutory language, the NOLs of a fiscal year carried over from its 2018 year (80% limited), taxpayer arising in a tax year that begins before and $100 of taxable income in its 2019 year. December 31, 2017 and ends after December 31, One approach is that the taxpayer can use all of 2017 are not subject to the 80% limitation but (for the NOL carryovers because under the revised most taxpayers) may not be carried back and may Section 172(a), the limitation for 2019 would be be carried forward indefinitely. However, both the $10, which is the lesser of (a) the NOL carryover Conference Report’s explanatory statement and subject to the 80% limitation ($10) and (b) 80% of the Joint Committee on Taxation’s revenue table the taxable income computed without regard to indicate that the provision applies to losses arising the NOL deduction ($80). It can also be argued in tax years beginning after December 31, 2017. It that the taxpayer cannot use any of the $10 NOL appears that technical correction to the law will be from 2018 because the aggregate NOL carryover necessary to fix this issue. deduction is limited to 80% of taxable income (again, computed without regard to the NOL Tax planning opportunities deduction) or $80. Under this interpretation, the Taxpayers may want to consider the interaction available NOLs are absorbed chronologically, so of the 80% limitation on their tax position and the 2017 NOL is absorbed but none of the 2018 consider other tax strategies to mitigate the NOL is used. Further guidance from the IRS will loss of the full NOL deduction. The increased be needed to determine which approach will be expensing allowances provided under TCJA allowed. may be considered for this. Taxpayers may find

The new tax law also repeals the pre-enactment it beneficial to stagger purchases as long as full carryback provisions for NOLs. The statutory expensing is available, or selectively elect out language indicates that this provision applies to of full expensing for property in one or more NOLs arising in tax years ending after December depreciation recovery classes during this period if 31, 2017, although it permits a new two-year doing so would avoid creating or increasing NOLs carryback for certain farming losses and retains subject to the 80% limitation. pre-enactment law for NOLs of property and

Cooperatives will particularly want to consider casualty insurance companies. Certain carryback the 80% limitation in their planning as the provisions applied under pre-enactment law patronage dividend deduction may create a tax for specific categories of losses (e.g. “specified loss on the tax return if the cooperative is using liability losses” may be carried back 10 years). the “book” or “modified book” basis for paying its The repeal of the carryback provisions includes patronage dividend. the repeal of carryback limitations applicable to The 80% limitation on post-2017 NOLs and corporate equity reduction transactions (CERTs). the elimination of post-2017 NOL carrybacks CERTs were used by corporations to finance combined with the reduction of the corporate leveraged acquisitions or distributions with tax tax rate provide corporations with a significant refunds generated by the carryback of the interest incentive to accelerate deductions into 2017 and deductions resulting from the added leverage. to defer income into 2018. Certain limitations will apply to these transactions The changes to the NOL carryover provisions in carrying back NOLs. may have an impact on the financial statement The new tax law provides for the indefinite treatment of loss carryovers incurred in future tax carryforward on NOLs arising in tax years ending years, given that unused loss carryovers no longer after December 31, 2017. This replaces the 20- expire. year carryforward under old law.

Treasury and the IRS National Office continue As with many other areas of the new tax law, to work on providing guidance on the TCJA law. drafting errors in the law have caused issues Taxpayers and practitioners are encouraged to visit for fiscal year taxpayers. The 80% limitation the IRS website for information.

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