Question

P and S Corporations form in Year 1, with S as P’s wholly-owned subsidiary. The corporations immediately elect to file consolidated tax returns. The group reports the following results:

Taxable Income
Group Member	Year 1	Year 2	Year 3	Year 4
P	$9000	$20000	$21000	$25000
S	($7800)	($30000)	($16000)	$2000
Consolidated taxable income (Before NOL deduction)	$1200	($10000)	$5000	$27000

In what year(s) can the group deduct the Year 2 consolidated NOL? Assume that Year 2 is a post-2017 year.

Answer 1

Answer:

To file a consolidate return the corporations must be an affiliated group. An affiliated group exists when one corporation owns at least 80 percent of the voting power and stock value of another corporation.

Whenever consolidated group’s losses exceed profitable group’s taxable income consolidated net operating loss (CNOL) is created. Under the Tax Cuts and Jobs Act (TCJA), corporate NOLs that are generated in tax years ending after December 31, 2017, cannot be carried back, but instead can be carried forward indefinitely. Under the earlier rules, corporate NOLs were eligible for a two-year carryback and a twenty-year carryforward.

Under the TCJA, for NOLs arising in tax years beginning after December 31, 2017, in a single tax year the amount of an NOL carryforward that a corporation may deduct is equal to the lesser of the available NOL carryforward or 80% of the group’s pre–NOL deduction taxable income.

Years            Particulars                                                                       Deductions Available   Balance NOL

3                  Lesser of (80% of 5,000) 4,000 or 10,000                           4,000                                          6,000. (10,000-4,000)

4                  Lesser of (80% of 27,000) 21,600 or 6,000                        6,000   NIL