Last week Governor Sununu signed Senate Bill 435 which ends the double apportionment of Net Operating Losses (NOLs). The change goes into effect July 1st, but applies to businesses with tax years ending on or after December 31, 2022.
Business has an apportionment rate of 50% applicable to NH in year 1, they have a loss of $100,000. With an apportionment rate of 50% they carryforward $50,000 to year 2. In year 2 they have a 50% apportionment rate applicable to NH and profits of $100,000. The company takes profits of $100,000 less their NOL of $50,000 to get adjusted business profits of $50,000. Then these profits are multiplied by the 50% apportion rate to get taxable business profits of $25,000.
Normally a business would have expected that if they had a loss of $100,000 in year 1 and profits of $100,000 in year 2 that the adjusted business profits after the NOL in year 2 would be zero, however, based on NH’s calculations the math was reducing the NOL twice.
Under the new method the apportionment rate will only be used once in the year the NOL is generated. Under the new apportionment method, year 2 profit will be apportioned before the NOL is applied. So using our previous example, year 2 profit of $100,000 will be apportioned 50% to $50,000 and then the NOL from year 1 will adjust those profits.
Another change as part of Senate Bill 435 is conformity to the IRS treatment of NOLs. Beginning in 2018 the IRS limited the application of new NOLs to 80% of current year income. New Hampshire is also implementing this change effective for tax years ending on or after December 31, 2022. This means that using our previous example, if adjusted business income is $50,000 only 80% or $40,000 of the income can be offset by the NOL. In our year 2 example the $50,000 will be adjusted by $40,000 of the NOL so that there are taxable profits of $10,000. The remaining NOL of $10,000 will be carried forward to year 3.
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