Connecticut will not adopt the five-year carryback for net operating losses in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act for corporation business tax purposes, according to new guidance.
The guidance, issued July 7 by the Connecticut Department of Revenue Services, explains that “for corporation business tax purposes, Connecticut has its own specific rules for NOLs that are not impacted by the federal carryforward and carryback rules.”
The CARES Act made changes to the NOL provisions implemented by the federal Tax Cuts and Jobs Act, allowing losses to be carried back five years and suspending the 80 percent limitation on carryforwards for tax years beginning after December 31, 2017, and before January 1, 2021. The changes are designed to provide temporary liquidity to businesses that have been affected by the COVID-19 pandemic.
Connecticut's corporation business tax applies to C corporations.
For individual income tax purposes, the department said the “carryback of federal NOLs that affect an individual’s income tax liability in Connecticut will be applied consistent with the Connecticut Tax Court’s decision in Adams v. Sullivan.” In Sullivan, the court ruled that individual taxpayers using an NOL carryback provision for prior-year returns must use federal taxable income to offset losses, not state adjusted gross income.
The department said the losses would be subject to Connecticut statute 12-727(b).
The guidance also explains that federal stimulus checks and loans forgiven under the Paycheck Protection Program are not subject to state income tax.
Kathleen Quinn, partner at McDermott Will & Emery, told Tax Notes July 8 that there is nothing surprising in the guidance from a corporate tax perspective.
“Connecticut does not conform to IRC section 163(j), as amended by the TCJA, or the federal NOL regime so the CARES Act amendments related to those provisions do not have an impact in Connecticut,” she said.
Jamie Yesnowitz, national tax office leader at Grant Thornton LLP, told Tax Notes July 8 that he appreciates the guidance and the resolution of any potential uncertainty regarding the nontaxability of stimulus checks and Paycheck Protection Program loan forgiveness.
Yesnowitz said that given “the significant implications of the CARES Act with respect to the qualified improvement property fix for purposes of depreciation . . . it would be helpful to see guidance from the department confirming that the reduction to useful life periods for such property apply in Connecticut, despite the state’s historic lack of conformity with the Sec.168(k) bonus depreciation provision.”
“I hope that this provides taxpayers and practitioners with the opportunity to request additional guidance that can be published as needed,” he added.