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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Give your feedback on draft of new Corporation Franchise Tax Regulations

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The New York State Department of Taxation and Finance has been drafting new Corporation Franchise Tax Regulations to incorporate the changes made by the corporate tax reform legislation that went into effect in 2015. 

The newest draft regulations address net operating losses carried forward from pre-2015 tax years. In order to preserve the value of unused NOLs that arose prior to 2015, New York has created a prior net operating loss conversion (PNOLC) subtraction pool that can be applied against apportioned income in post-2015 tax years.

What’s proposed:

These are draft amendments to the New York State Business Corporation Franchise Tax Regulations, Subpart 3-9, Computation of the Prior Net Operating Loss Conversion (PNOLC) Subtraction, comprising sections 3-9.1 through 3-9.11.  Unused net operating losses (NOLs) generated before the taxable year 2015 will be converted to a subtraction deduction, the PNOLC subtraction, to be applied against the taxpayer’s apportioned business income and subject to limitations described in the draft regulations.

Taxpayers can use up to 1/10 of the subtraction pool in each year for the first ten years beginning in 2015 and carry forward any unused amounts for up to 20 years. The draft regulations make clear that beginning in the 11th year, there is no limitation on the PNOLC amount that can be deducted.

Alternatively, taxpayers can elect to use 50% of the PNOLC subtraction in each of the 2015 and 2016 tax years, but any unused amounts will be forfeited. The draft regulations state that the election must be made on a timely, original return but the election is revocable by filing an amended return.

Eligible small business taxpayers have no limitation on the amount of the PNOLC they may use in any year.

The draft regulations detail the computation of PNOLC subtraction amounts, address how the new combined reporting rules (see text of draft regulations for combined reporting) as well as changes to a combined group affect the PNOLC subtraction, and include other rules specific to the PNOLC subtraction as well as examples.

Taxpayers should pay close attention to their calculation of the PNOLC subtraction. The draft regulations indicate that taxpayers will be required to attach a detailed schedule with Form CT 3.3 (PNOLC Subtraction) to reflect the calculation of the pool and the carryforward amounts. The Tax Department will require taxpayers to provide support for the PNOLC subtraction, including the calculation of the amount in the pool, so long as the statute of limitations is open for a year in which a deduction is claimed.

New York State has requested public comment on the draft regulations, which can be found here.  Overall, the Tax Department has welcomed comments and questions on its corporate legislation and draft regulations, and it has incorporated some of the proposed changes from stakeholders and practitioners in its revisions to other draft regulations.

Comments on the Prior Net Operating Loss Conversion (toward the bottom) -- or the PNOLC -- are due 8/3/17. You can submit them to tax.regulations@tax.ny.gov.

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