The Commonwealth Court of Pennsylvania on November 21 struck the state’s fixed-dollar amount net loss carryover (NLC) limitation to remedy the limitation’s unconstitutional effect.
For the 2001 tax year, corporations were limited to carrying over $2 million of loss from prior years. Consistent with a prior Pennsylvania Supreme Court decision, the parties agreed that the NLC limitation violated the Pennsylvania Consitution’s Uniformity Clause but disagreed on the remedy. The court could have severed from the state code either: (1) the entire NLC provision, which would have precluded taxpayers from taking any net loss deduction; or (2) only the $2 million limitation, effectively uncapping the deduction. The court found that only the $2 million limitation should be severed, thus allowing for an unlimited NLC for the taxpayer.
Enacted on October 30, 2017, H.B. 542 removes the fixed-dollar NLC limitation ($5 million at the time of removal) and increases the percentage limitation to 35% of taxable income for tax years beginning after December 31, 2017, and 40% of taxable income for tax years beginning after December 31, 2018. Click here for our Insight summarizing H.B. 542.
We expect the state to appeal the GM decision to the Pennsylvania Supreme Court. There, that court will be asked to reconcile the remedy question, in light of the different outcomes for GM and Nextel following the same uniformity violation. For taxpayers with appeals pending before a court or at administrative levels in Pennsylvania, this may provide an opportunity to claim an unlimited NLC deduction for all years through December 31, 2017. Taxpayers with open tax years may want to consider filing protective refund claims. Generally, the statutory due date for refund claims is three years from the original return due date.