The New NOL Rule Nobody Understands

As Niyant mentioned just before we filmed this video, “It’s not really new, at this point.” Passed in 2017, the TCJA significantly altered the treatment of net operating loss carryforwards and carrybacks (NOLs). These changes have since been made permanent with the 2025 passage of the Big Beautiful Bill (OBBBA).

Prior to TCJA, NOLs could be carried forward for 20 years and carried back for 2. That meant if you had a loss in 2015, you could use it to offset your past gains in 2014 or your future gains (if incurred) in 2016-2035. TCJA changed those rules: Instead of 20 years, the carryforward period is now indefinite. And carrybacks are no longer allowed.

When we author valuations at Mercovus, we frequently review CFOs’ financial forecasts. In going through hundreds of these forecasts, we’ve found that most companies understand the above changes to the NOL carryback and carryforward rules. But there’s one other change they don’t know about: In applying the NOL carryforward, you can only offset 80% of your tax burden. In other words, the company still has to pay something.

I didn’t follow the commentary and negotiations surrounding this bill, but I imagine the justification for this rule was the same as for the alternative minimum tax (AMT). Some lawmakers simply viewed it as unfair that there were companies making millions of dollars and paying zero income tax.

So even if you have $100 million tax NOL balance, the first year you earn a profit, you can expect to pay corporate income tax (CIT). It’ll be a “nice problem to have,” but a problem nonetheless. Be prepared!

Eric Sundheim, ASA

Principal

Mercovus Valuations

*Subsequent to the date of filming, Fernway Solutions Inc. was acquired by EisnerAmper Group.