Net Operating Losses for Individuals and Fiduciaries

For tax years before 2018, filers could carry back NOLs to two years preceding the loss or carry forward NOL for 20 years.

The 2017 Tax Cuts and Jobs Act (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, but this 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 on NOLs. You may need to adjust your Minnesota return to align with the TCJA rules.

For details 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.

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, 2022 (or 46½ months after December 31, 2018).

This table and these examples explain how your Minnesota residency affects your NOLs.

Residency Example 1

Denise was a California resident in 2019. She generated an NOL in 2019 and elected to carry it forward. She moved to Minnesota late in 2019 and was a full-year resident of Minnesota in 2020. Her 2020 federal tax return will include the 2019 NOL carryover, and the benefit will flow to her Minnesota return.

Residency Example 2

Theo was a Minnesota resident during 2019 and moved to California in 2020. He incurred an NOL in 2020 and carried it back to his 2019 federal return. Theo should amend his 2019 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 2020. She incurred an NOL in 2020 and carried it back to her 2018 and 2019 returns. Because she did not file Minnesota returns in 2018 or 2019, 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 may not 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. 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. Go to Find a Form and put in the year and form name to get the correct form.

• 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
• Schedule M1CWFC, Minnesota Child and Working Family Credits

Bonus Depreciation Example

Carlotta, a sole proprietor, purchased an asset for her business and claimed federal bonus depreciation of $30,000 in 2024. Purchasing the asset resulted in an NOL of $20,000. She carried the loss forward to 2025.

Carlotta calculates her bonus depreciation addition and future subtraction as follows:
Per Schedule M1MB, Carlotta would use the worksheet for Line 1. The instructions state, "If bonus depreciation included on step 1 or step 2 generated a loss in an activity that cannot be deducted in 2024 (e.g., a passive activity loss, excess business loss, or loss in excess of basis), you may reduce step 1 or 2 by the amount of loss not allowed from the activity for 2024, up to the bonus depreciation claimed by the activity.

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

2024 Bonus Depreciation Addition: $8,000 (as calculated below)
Step 1: Bonus Depreciation of $30,000 reduced by NOL of $20,000 = $10,000
Step 2: Multiply step 1 by 0.80: $10,000 X 0.80 = $8,000 addition

2025 (and future years) Bonus Depreciation Subtraction: $1,600 per year (as calculated below)
Step 1: 2024 bonus depreciation addition = $8,000 
Step 2: Multiply Step 1 by 0.20 = $1,600

*NOTE: In a future year when the 2024 suspended loss is allowed, you must include the bonus depreciation as an addition.