Net Operating Losses

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), for tax years before 2018, filers could generally carry back NOLs to two years preceding the loss or carry forward NOL for 20 years.

The TCJA eliminated the rules allowing a two-year carryback of NOLs, while allowing for the indefinite carryforward of NOLs beginning in tax year 2018. Farmers can still carryback losses from 2018 and 2019, and this carryback is limited to two years.

For federal tax purposes, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows filers to carryback losses earned in 2018, 2019, or 2020. Filers may be able to carry back these losses for five years on their federal return.

Minnesota does not recognize the CARES Act provisions regarding NOLs. You may need to adjust your Minnesota return to align with the TCJA rules.

For more information on federal NOL rules, see IRS Publication 536.

Minnesota follows the laws under the Internal Revenue Code as amended through December 31, 2018, which includes the TCJA. The NOL deduction is limited to 80% of your taxable income, and you may carry it forward indefinitely if the NOL is generated in taxable years after 2017. An NOL generated in taxable years prior to 2018 has the same treatment for Minnesota returns as it does on federal returns.

You may apply the excess NOL to the next eligible year on your federal return. Since Minnesota does not have a similar carryover provision, you may lose some of the tax benefit from an NOL on your state return. This can occur when adjustments on your return reduce your Minnesota taxable income.

Carryback Example
Cliff had federal taxable income of $20,000 in 2018. In tax year 2019, Cliff carries back a $20,000 NOL, reducing his 2019 federal taxable income to zero. Cliff had a subtraction on his 2017 Minnesota return for $5,000 of U.S. savings bond interest, so his state taxable income was only $15,000 in 2018.

The NOL carryback of $20,000 reduces Cliff's 2018 state taxable income to negative $5,000. Cliff may not carry over the $5,000 to a different year on his Minnesota return. Therefore, he does not get any state tax benefit from that part of the original NOL.

Under the TCJA, for tax years 2018 through 2020, noncorporate taxpayers were permitted deductions attributable to a trade or business only up to the amount of the income or gain attributable to that trade or business for the tax year, plus $250,000 ($500,000 for joint filers). The CARES Act lifted these limitations.

If you amend your federal return to remove the limitation on excess business losses, you may need to adjust your Minnesota return to conform with the TCJA rules.

Refund Claim Example
Jabar has an NOL in 2018 and plans to carry it back to his 2016 return. Normally, he would have until October 15, 2020, to amend his 2016 return and claim a refund. However, since Jabar’s refund claim in based on an NOL carryback, he has until October 15, 2020 (or 45½ months after December 31, 2016).

The following table and examples explain how your Minnesota residency affects your NOLs.

Residency Example 1

Denise was a California resident in 2018. She generated an NOL in 2018 and elected to carry it forward. She moved to Minnesota late in 2018 and was a full-year resident of Minnesota in 2019. Her 2019 federal tax return will include the 2018 NOL carryover, and the benefit will flow to her Minnesota return.

Residency Example 2

Theo was a Minnesota resident during 2018 and moved to California in 2019. He incurred an NOL in 2019 and carried it back to his 2018 federal return. Theo should amend his 2018 Minnesota return to claim a refund and report changes to federal taxable income because of his NOL.

Residency Example 3

Jade was an Iowa resident. She moved to Minnesota in 2019. She incurred an NOL in 2019 and carried it back to her 2017 and 2018 returns. Because she did not file Minnesota returns in 2017 or 2018, she receives no Minnesota benefit. Jade could elect to carry forward the losses on her federal return if she wants a Minnesota benefit.

Residency Example 4

Claire is an Iowa resident with the following income:

Although Claire has a loss from Minnesota activities, there is no NOL on her federal return for the year. She cannot use the loss for Minnesota purposes. Since there is no federal loss for that year, Claire is not allowed to carry the partnership’s loss to other years on her Minnesota return.

You may not use NOL carryovers when computing household income for the K-12 Education Credit and the Homestead Credit Refund (for Homeowners) and Renter’s Property Tax Refund. You must add back any NOL carryovers when calculating household income for these credits. You do not need to recalculate these credits when you carry back NOLs to a previous year.

How do NOLs affect my federal adjusted gross income?
NOL carryovers reduce federal adjusted gross income. If you carry back an NOL, you must amend these related items on your Minnesota return:

• Schedule M1WFC, Working Family Credit
• Schedule M1R, Age 65 or Older/Disabled Subtraction
• Schedule M1CR, Credit for Income Tax Paid to Another State
• Schedule M1MT, Alternative Minimum Tax
• Schedule M1NR, Nonresidents/Part-Year Residents
• Schedule M1RCR, Credit for Tax Paid to Wisconsin

Bonus Depreciation Example

Carlotta, a sole proprietor, purchased an asset for her business and claimed federal bonus depreciation of $30,000 in 2018. Purchasing the asset resulted in an NOL of $20,000. She carried the loss forward to 2019.

Carlotta calculates her bonus depreciation addition and future subtraction as follows:

2018 Bonus Depreciation Addition: $24,000 (as calculated below)

• Step 1 – Bonus depreciation claimed on the federal return: $30,000
• Step 2 – Multiply step 1 by 0.80 for bonus depreciation addition: $24,000

2019 (and future years) Bonus Depreciation Subtraction: $800 per year (as calculated below)

• Step 1 – 2018 bonus depreciation addition: $24,000
• Step 2 – 2019 NOL carryover (entered as a positive amount): $20,000
• Step 3 – Subtract step 2 from step 1: $4,000
• Step 4 – Multiply step 3 by 0.20 for bonus depreciation subtraction: $800