Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.
Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.
Old NOL Rules
You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.
Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.
New NOL Rules
Tax reform made two key changes to the NOL rules:
> You can no longer carry back the NOL (except for certain qualified farming losses).
> Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.
The changes put more money in the IRS’s pocket by eliminating your ability to get an immediate tax benefit from your NOL carryback, and delaying your ability to get tax benefits from future NOL carryforwards.
We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.
If you are a small employer (fewer than 50 employees), you should consider the qualified small-employer health reimbursement account (QSEHRA) as a good way to help your employees with their medical expenses.
If the QSEHRA is indeed going to be your plan of choice, then you have three good reasons to get that QSEHRA plan in place on or before October 2, 2018. First, this avoids penalties. Second, your employees will have the time they need to select health insurance. Third, you will have your plan in place on January 1, 2019, when you need it.
One very attractive aspect of the QSEHRA is that it can reimburse individually purchased insurance without your suffering the $100-a-day per-employee penalty. The second and perhaps most attractive aspect of the QSEHRA is that you know your costs per employee. The costs are fixed—by you.
Eligible employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.
Eligible employees. All employees are eligible employees, but the QSEHRA may exclude
> employees who have not completed 90 days of service with you,
> employees who have not attained age 25 before the beginning of the plan year,
> part-time or seasonal employees,
> employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
> employees who are non-resident aliens with no earned income from sources within the United States.
Dollar limits. Tax law indexes the dollar limits for inflation. The 2018 limits are $5,050 for self-only coverage and $10,250 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual.