On July 11th, the Pennsylvania General Assembly passed and Governor Shapiro signed the 2024-25 fiscal year budget. As part of this budget, changes were made to the Pennsylvania net operating loss (NOL) deduction.
Facts:
Currently, Pennsylvania limits the utilization of NOL carryforwards for corporate taxpayers to 40% of taxable income. The new budget provides relief and increases this limitation by an additional 10% per year starting with tax years beginning after December 31, 2025 (see table below) through tax years beginning after December 31, 2028, when the limitation reaches 80%. However, the increases in the limitation apply to only those losses that are incurred after December 31, 2024. For losses that are generated before January 1, 2025, the 40% limitation will still apply, but the overall net loss deduction in a given year going forward can be increased by 10% of taxable income if the corporate taxpayer generates losses after December 31, 2024. The net loss deduction is determined as follows:
- For net losses incurred in taxable years beginning prior to 1/1/2025, deduct 40% of taxable income
- For net losses incurred in taxable years after 12/31/2024 deduct:
- The applicable percentage rate for each year (see table below) – the actual percentage of taxable income deducted under item 1. multiplied by taxable income
In other words, NOLs generated prior to January 1, 2025 can only offset up to the first 40% of taxable income. Any losses generated thereafter, are subject to the limitation set for that particular year. Refer to the table and examples below.
| If loss generated in tax years beginning…. | And losses are utilized in tax years beginning…. | Then the net loss deduction is limited to…. | |
| Step 1 | Prior to January 1, 2025 | After December 31, 2024 and thereafter | 40% of taxable income |
| Step 2 (phase 1) | After December 31, 2024 and before January 1, 2026 | Prior to January 1, 2026 | 40% of taxable income, after accounting for NOLs utilized in Step 1 |
| Step 2 (phase 2) | After December 31, 2024 and thereafter | After December 31, 2025 and prior to January 1, 2027 | 50% of taxable income, after accounting for NOLs utilized in Step 1 |
| Step 2 (phase 3) | After December 31, 2024 and thereafter | After December 31, 2026 and prior to January 1, 2028 | 60% of taxable income, after accounting for NOLs utilized Step 1 |
| Step 2 (phase 4) | After December 31, 2024 and thereafter | After December 31, 2027 and prior to January 1, 2029 | 70% of taxable income, after accounting for NOLs utilized Step 1 |
| Step 2 (phase 5) | After December 31, 2024 and thereafter | After December 31, 2028 and thereafter | 80% of taxable income, after accounting for NOLs utilized Step 1 |
Example #1
- Company XYZ, with a calendar-year end of December 31, has generated the following income and losses over the next several years:
| Generation | |
| Tax Year | Activity |
| 12/31/2022 | (200,000) |
| 12/31/2023 | (200,000) |
| 12/31/2024 | 500,000 |
| 12/31/2025 | (75,000) |
| 12/31/2026 | (50,000) |
| 12/31/2027 | 325,000 |
- For the tax year ending December 31, 2024, only $200,000 of NOLs will be used to offset taxable income ($500,000 x 40%)
- For the tax year ending December 31, 2027, a total of $195,000 of NOLs will be used to offset taxable income ($325,000 x 60%). Only $130,000 of the pre-2025 NOLs will be used to offset taxable income ($325,000 x 40%). The remaining $65,000 of NOLs will come from the NOLs generated in years after December 31, 2024. See table below:
| Example 1 – Answer | |||||||
| Generation | Utilization | ||||||
| Tax Year | Activity | 12/31/2025 | 12/31/2027 | NOLs Remaining | |||
| 12/31/2022 | (200,000) | 200,000 | – | – | |||
| 12/31/2023 | (200,000) | 130,000 | (70,000) | ||||
| 12/31/2024 | 500,000 | (200,000) | |||||
| 12/31/2025 | (75,000) | 65,000 | (10,000) | ||||
| 12/31/2026 | (50,000) | (50,000) | |||||
| 12/31/2027 | 325,000 | (195,000) | |||||
Example #2
- Company XYZ, with a calendar-year end of December 31, has generated the following income and losses over the next several years:
| Generation | |
| Tax Year | Activity |
| 12/31/2022 | (200,000) |
| 12/31/2023 | (200,000) |
| 12/31/2024 | 500,000 |
| 12/31/2025 | (75,000) |
| 12/31/2026 | (60,000) |
| 12/31/2027 | (100,000) |
| 12/31/2028 | 475,000 |
- The answer for the tax year ending December 31, 2024 is the same as the above.
- For the tax year ending December 31, 2028, a total of $332,500 of NOLs will be used to offset taxable income ($475,000 x 70%). Only $190,000 of the pre-2025 NOLs will be used to offset taxable income ($475,000 x 40%). The remaining $142,500 of NOLs will come from the NOLs generated in years after December 31, 2024. See table below:
| Example 2 – Answer | |||||||
| Generation | Utilization | ||||||
| Tax Year | Activity | 12/31/2025 | 12/31/2028 | NOLs Remaining | |||
| 12/31/2022 | (200,000) | 200,000 | – | ||||
| 12/31/2023 | (200,000) | 190,000 | (10,000) | ||||
| 12/31/2024 | 500,000 | (200,000) | |||||
| 12/31/2025 | (75,000) | 75,000 | – | ||||
| 12/31/2026 | (60,000) | 60,000 | – | ||||
| 12/31/2027 | (100,000) | 7,500 | (92,500) | ||||
| 12/31/2028 | 475,000 | (332,500) | |||||
Implications
- This legislative change will only affect tax years beginning after December 31, 2024, considering that any losses generated before then will continue to be limited to 40% of taxable income.
- It is imperative that corporate taxpayers track the generation and utilization of the NOLs given these changes in the limitations.
- For those corporate taxpayers with valuation allowances, it is important to consider the change in how NOLs within the state of Pennsylvania will be utilized over the next several years and whether a valuation allowance should be released as a result of the increase in limitation. Moreover, this should be considered within a taxpayer’s scheduling of the reversal of deferred tax items as a source of income.
For additional information on other changes that accompanied this bill, please refer to our article here.
Resource Links: SB 654
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