The Net Operating Loss (NOL) carry-back and carry-forward periods have been changed. Under the new law, the carry-back period is now reduced to 2 years. The carry-forward period is increased to 20 years. This change is affective for tax years beginning after August 5, 1997.
The reduction in the NOL carry-back period doesn’t apply to NOLs for certain "eligible losses". In the case of an individual, "eligible losses" includes losses on property arising from fire, storm, shipwreck, or other casualty, or from theft. For these losses, the three year carry-back period remains. "Eligible losses" for a small business include Presidentially declared disasters.
The 97 Act also doesn’t modify the carry-back period for specified liability losses (10-year carry-back) or for REITs (no carry-back) and excess interest losses (no carry-back) and corporate capital losses.
The increase in the carry-forward period applies with respect to specified liability losses, REITs and excess interest losses.
For example, a NOL for 1997 can be carried back three years to 1994, but NOLs for 1998 can only be carried back to 1996.
IMPACT
Taxpayer’s who paid tax in 1995 and anticipate losses in 1998 may want to, if possible, accelerate the 1998 losses into 1997 so that the losses can be carried back to 1995.
To encourage venture capital, a rollover feature has been added to protect gains from the sale of qualified small business stock from tax if the gain is reinvested in other qualified small business stock.
The 1997 Act makes available to taxpayers an elective rollover of capital gain from the sale of qualified small business stock held for more than six months. If the election is made, capital gain from the sale of qualified small business stock is recognized only to the extent that the amount realized from the sale exceeds:
Example
On March 1, Corporation A sells qualified small business stock in corporation S, held by A for more than six months and a capital asset on A’s books, and realizes an amount of $500,000 from the sale. A’s basis in the stock sold on March 1 is $100,000. The gain is $400,000
On April 30, A purchases qualified small business stock in corporation U at a cost of $700,000. No other qualified small business stock is purchased by A in the period from March 1 to April 31.
If A elects to rollover the gain from the sale on March 1, none of the $400,000 of gain from the sale will be recognized because the amount realized ($500,000) does not exceed purchase cost of $700,000.
Further, under the 1997 Act, the amount of net capital gain taken into account in computing the alternative minimum tax on capital gains for corporations will not exceed the taxable income of the corporation.
Electronic filing of payroll and other federal tax payments is now available. Using either telephone or computer software, payments can be electronically transferred from the employer's bank directly to the IRS. This system is called the Electronic Federal Payment System (EFTPS).
Companies required to convert to the Electronic Federal Tax Payment System because their federal tax deposits in 1995 exceeded $50,000 will not be penalized for failure to use the system until June 30, 1998. This is an extended date.
The holding period for dividends-received deductions that are received or accrued after September 4, 1997 (not coming under a special two-year transitional rule) is lengthened.
A corporation that receives a dividend from another corporation is generally allowed to deduct a portion of the dividend. This deduction is available if a specified holding period is met. Under the old law, the holding period cannot include any period during which the shareholder is protected from the risk of loss of the ownership of the stock (such as from a short sale)
The new law makes it more difficult for a corporation to protect itself against a risk of loss and still qualify for the dividends-received deduction. Subject to a transition rule for dividend paying stock held on June 8, 1997, for dividends paid or accrued after September 4, 1997 to be entitled to dividends-received deduction, a corporation must satisfy the holding period for the dividend-paying stock over a period immediately before or immediately after it becomes entitled to receive the dividend.
For Farmers
For tax years beginning after 1987, the 1997 Act retroactively repeals the rule requiring AMTI to be computed without regard to the installment method for cash-basis farmers.. Thus, for purposes of computing alternative minimum taxable income (AMTI), cash-basis farmers who dispose of property connected with the business may use the installment method to compute AMTI.
For Other Businesses
Effective for tax years after May 6, 1997, AMT preference for portion of gain on sale of qualified small business stock is reduced from 50% to 42%. The result is that the AMT preference is now 21% of the total gain versus 25% under the old law.