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Net Operating Losses
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Federal net operating losses (NOLs) arise when your allowable deductions exceed your gross income for that tax year. NOLs can come from business activity losses as a sole proprietor, as a partner in a partnership, or from rental investments and farming.
Within certain limits, you can shift NOLs to certain state tax returns in previous years (carry back) or later years (carry forward) to lower your income tax for those years.
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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.
| If | And | Then |
|---|
| You have an NOL in a year that you were not a Minnesota resident | You carry the loss back or forward on your federal return to a year you were a Minnesota resident | You may carry the loss back or forward to the same year as the federal return. See Residency Examples 1 and 2 below. |
| You’re a Minnesota resident when the NOL occurs | You carry the loss back or forward on your federal return to a year you were not a Minnesota resident | You will lose the tax benefit of the loss for Minnesota purposes. See Residency Example 3 below. |
| You’re a nonresident with an NOL from activities in Minnesota | You have sufficient income from another state to offset the loss on your federal return | You’ll have no loss for federal or Minnesota purposes. See Residency Example 4 below. |
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:
| Wages | $50,000 |
| Interest income | $10,000 |
| Loss from a Minnesota partnership | ($5,000) |
| Federal adjusted gross income | $55,000 |
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 (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. 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
Bonus Depreciation Example
Carlotta, a sole proprietor, purchased an asset for her business and claimed federal bonus depreciation of $30,000 in 2019. Purchasing the asset resulted in an NOL of $20,000. She carried the loss forward to 2020.
Carlotta calculates her bonus depreciation addition and future subtraction as follows:
2019 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
2020 (and future years) Bonus Depreciation Subtraction: $800 per year (as calculated below)
- Step 1 – 2019 bonus depreciation addition: $24,000
- Step 2 – 2020 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
