N.J.A.C. 18:7-5.21 - Net Operating Losses for Privilege Periods Ending on and After July 31, 2019

(a) For privilege periods ending on and after July 31, 2019, unused unexpired net operating losses incurred in a privilege period ending prior to July 31, 2019, are converted to a post-allocation basis (prior net operating loss conversion carryovers) pursuant to N.J.S.A. 54:10A-4(u). Net operating losses incurred in a privilege period ending prior to July 31, 2019, are converted from pre-allocation net operating losses to prior net operating loss conversion carryovers, as follows:

1. Terms used in calculating the prior net operating loss conversion carryover are, as follows:

i. "Base year" means the last privilege period ending prior to July 31, 2019.

ii. "Base year BAF" means the taxpayer's business allocation factor as provided in sections 6 through 10 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-6 through 54:10A-10) for purposes of calculating entire net income for the base year, as such section was in effect for the last privilege period ending prior to July 31, 2019. The base year BAF is the allocation factor reported on the taxpayer's Schedule J of its respective New Jersey corporation business tax return.

iii. "UNOL" means the unabsorbed portion of a net operating loss, as calculated at N.J.S.A. 54:10A-4(k)(6), that was in effect for the base year, the last privilege period ending prior to July 31, 2019. The UNOL is the amount that was not deductible in previous privilege periods and was eligible for carryover on the last day of the base year subject to the limitations for deduction pursuant to this paragraph, including any net operating loss sustained by the taxpayer during the base year. The UNOL is the amount reported on Form 500;

2. The prior net operating loss conversion carryover shall be calculated as follows:

i. The taxpayer shall first calculate the tax value of its UNOL for the base year and for each preceding privilege period for which there is a UNOL. The tax value of the UNOL for each privilege period is equal to the product of:

(1) The amount of the taxpayer's UNOL for a privilege period; and

(2) The taxpayer's base year BAF. This result shall equal the taxpayer's prior net operating loss conversion carryover.

ii. The taxpayer shall continue to carry over its prior net operating loss conversion carryover to offset its allocated entire net income as provided in sections 6 through 10 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-6 through 54:10A-10) for privilege periods ending on and after July 31, 2019. Such carryover periods shall not exceed the 20 privilege periods following the privilege period of the initial loss. The entire amount of the prior net operating loss conversion carryover for any privilege period shall be carried to the earliest of the privilege periods to which the loss may be carried. The portion of the prior net operating loss conversion carryover that shall be carried to each of the other privilege periods shall be the excess, if any, of the amount of the prior net operating loss conversion carryover over the sum of the entire net income, computed without the exclusions permitted at N.J.S.A. 54:10A-4(k)(4) and (5) allocated to this State. For privilege periods ending on and after July 31, 2023, for the purpose of computing taxable net income for a current privilege period, the amount of the prior net operating loss conversion carryover shall be subtracted from entire net income allocated to this State, after the application of N.J.S.A. 54:10A-4(k)(4) and (5) against current privilege period income when the entire net income allocated to this State for the privilege period is greater than zero. Taxpayers are not permitted to adjust their prior net operating loss conversion carryovers to reverse the ordering rules for the prior net operating loss conversion carryovers and the dividend exclusion for the periods the prior net operating loss conversion carryovers were originally generated.

iii. The prior net operating loss conversion carryover computed pursuant to this paragraph shall be applied against the entire net income allocated to this State before the net operating loss carryover computed pursuant to N.J.S.A. 54:10A-4(v);

3. In calculating the prior net operating loss conversion carryovers, taxpayers must complete Worksheet 500-P (Form 500U-P in the case of combined group members). Taxpayers must retain a copy of Worksheet 500-P (Form 500U-P) in their books and records for inspection until 2044 (that is, four years subsequent to the original due date of the return representing the last period for which the prior net operating loss conversion carryover could be carried over for use before expiring);

4. The limitations provided for at N.J.S.A. 54:10A-4(k)(6)(D) and 54:10A-4(k)(6)(F) shall apply to the prior net operating loss conversion carryovers; and

5. Extension of net operating loss carryovers generated pursuant to [N.J.S.A. 54:10A-4.3](/navigator/019dabbf-270f-775e-bbf7-a351651b6519/title_18.chapter_7.subchapter_5.section_7_5_21). All unused unexpired net operating loss carryovers that were unexpired after July 31, 2019, and that were converted to prior net operating loss conversion carryovers have an additional five-year carryover period, in addition to the original 15-year carryover period pursuant to [N.J.S.A. 54:10A-4.3](/navigator/019dabbf-270f-775e-bbf7-a351651b6519/title_18.chapter_7.subchapter_5.section_7_5_21).

(b) For the purposes of the net operating loss deduction calculation pursuant to N.J.S.A. 54:10A-4(v), a net operating loss deduction is the amount allowed as a deduction for the net operating loss carryover to the privilege period, and is calculated as follows:

1. A net operating loss for any privilege period ending on or after July 31, 2019, shall be a net operating loss carryover to each of the 20 privilege periods following the period of the loss. The entire amount of the net operating loss for any privilege period shall be carried over to the earliest of the privilege periods to which the loss may be carried over. For privilege periods ending before July 31, 2023, the portion of the loss that shall be carried over to each of the other privilege periods shall be the excess, if any, of the amount of the loss over the sum of the entire net income, computed without the exclusions permitted at N.J.S.A. 54:10A-4(k)(4) and (5) allocated to this State. For privilege periods ending on and after July 31, 2023, the portion of the loss that shall be carried over to each of the other privilege periods shall be the excess, if any, of the amount of the loss over the sum of the entire net income, after the application of N.J.S.A. 54:10A-4(k)(4) and (5) allocated to this State; provided, however, for the purpose of computing taxable net income for the privilege period, the net operating loss carryover shall only be subtracted from entire net income allocated to this State when the entire net income allocated to this State is greater than zero;

2. For purposes of this subsection, the term "net operating loss" means the excess of the deductions over the gross income used in computing entire net income, without regard to any net operating loss carryover, and for privilege periods ending before July 31, 2023, computed without the exclusions at N.J.S.A. 54:10A-4(k)(4) and (5), and for privilege periods ending on and after July 31, 2023, computed after the application of N.J.S.A. 54:10A-4(k)(4) and (5), allocated to this State pursuant to N.J.S.A. 54:10A-6 through 54:10A-10;

3. A net operating loss for any privilege period ending on or after July 31, 2019, and any net operating loss carryover to such privilege period, shall be reduced by the amount excluded from Federal taxable income pursuant to subparagraphs (A), (B), or (C) of paragraph (1) of subsection (a) at section 108 of the Federal I.R.C., 26 U.S.C. § 108, for the privilege period relating to the discharge of indebtedness;

4. A net operating loss carryover shall not include any prior net operating loss conversion carryovers;

5. Where there is a change in 50 percent or more of the ownership of a corporation because of redemption or sale of stock and the corporation changes the trade or business giving rise to the loss, no net operating loss sustained before the changes may be carried over to be deducted from income earned after such changes. In addition, where the facts support the premise that the corporation was acquired under any circumstances for the primary purpose of the use of its net operating loss carryover, the Director may disallow the carryover; provided, however, this paragraph shall not apply between members of a combined group reported on a New Jersey combined return; and

6. For net operating losses generated in privilege periods ending before July 31, 2023, taxpayers are not permitted to adjust their net operating losses and net operating loss carryovers to reverse the ordering rules for the net operating losses and net operating loss carryovers and the dividend exclusion.

(c) For privilege periods beginning on and after January 1, 2020, the provisions of the Internal Revenue Code, the Federal rules, limitations, and restrictions, thereto, governing Federal net operating losses and Federal net operating loss carryovers with regard, but not limited to: mergers, acquisitions, reorganizations, spin-offs, split-offs, dissolution, bankruptcy, or any form of cessation of a business, or any other provision that limits or reduces Federal net operating losses and Federal net operating loss carryovers, shall apply to New Jersey net operating loss carryovers pursuant to subsection (v) of section 4 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-4) and the New Jersey net operating loss carryover provisions of subsection h. of section 18 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.6).

1. The Federal rules and regulations governing Federal consolidated return net operating losses and net operating loss carryovers shall apply to New Jersey net operating loss carryover provisions at [N.J.S.A. 54:10A-4.6.h](/navigator/019dabbf-270f-775e-bbf7-a351651b6519/title_18.chapter_7.subchapter_5.section_7_5_21), as though the combined group filed a Federal consolidated return, regardless of how the members of the combined group filed for Federal purposes to the extent consistent with the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.).

(d) For more information on PNOLs and NOLs in relation to combined groups and combined reporting, see N.J.A.C. 18:7-21.

(e) Except in instances where a unitary business relationship exists upon the merger or acquisition of separate return filers, N.J.S.A. 54:10A-4.5.b does not apply to separate return filers.

(f) For the purposes of computing taxable net income, "taxable net income" means entire net income allocated to this State as calculated pursuant to N.J.S.A. 54:10A-6 through 54:10A-8, as modified by subtracting any prior net operating loss conversion carryforward calculated pursuant to N.J.S.A. 54:10A-4(u) and any net operating loss calculated pursuant to N.J.S.A. 54:10A-4(v) or 54:10A-4.6.h.

1. For privilege periods ending on and after July 31, 2023, when subtracting any net operating losses calculated pursuant to N.J.S.A. 54:10A-4(v) or 54:10A-4.6.h, the limitation set forth in paragraph (2) of subsection (a) of I.R.C. § 172 (26 U.S.C. § 172(a)(2)) shall apply, except that August 1, 2023, is substituted for the reference to January 1, 2018, in subparagraph (A) of paragraph (2) of subsection (a) of I.R.C. § 172 (26 U.S.C. § 172), and July 31, 2023, is substituted for the reference to December 31, 2017, in subparagraph (B) of paragraph (2) of subsection (a) of I.R.C. § 172 (26 U.S.C. § 172).

2. For privilege periods ending on and after July 31, 2023, for a combined group, before subtracting the prior net operating loss conversion carryforwards and subtracting the net operating losses of the combined group when computing the total taxable net income, the combined group shall first add together the allocated entire net income from the unitary business of the combined group and the portion of allocated entire net income of members with activities independent of the group and then subtract the prior net operating loss conversion carryforwards and then the net operating losses.