AL group may use NOLs generated before consolidated election

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September 2017

Overview

​The Alabama Court of Civil Appeals ruled that the NOLs of a member of an Alabama Affiliated Group (AAG) generated before the consolidated filing election was made could be used to offset the group’s income on a consolidated return. Alabama law provides that pre-consolidation NOLs may be carried forward to consolidated returns, subject to SRLY limitations, which apply to NOLs generated by members before they become part of the AAG.

The takeaway

The Court concluded that NOLs from separate Alabama income tax returns may be used to offset consolidated taxable income on returns filed after the consolidated election is made. Opportunities may exist for taxpayers that have applied SRLY rules to NOLs on consolidated returns when the NOLs were generated before the election was made but after the member met the requirements for being included in the AAG.

One matter to consider is the composition of an AAG.  For 1999 through 2001 tax years, an AAG consisted of all corporations that filed a consolidated federal return so long as one member had nexus with Alabama.  However, effective for tax years beginning in 2002, an AAG includes only those members of a federal affiliated group that have nexus with Alabama (i.e., nexus consolidation).  Therefore, when determining whether a corporation was a member of an Alabama affiliated group in a loss year after 2001, nexus considerations may be required.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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