Written by: Matt McCord

In a case in 2015, the Virginia Department of Taxation determined that a taxpayer was not entitled to a net operating loss deduction in 2015 because the taxpayer failed to elect to forego the carryback as required. The loss should have been carried back to prior periods and no loss would have remained available to carry forward to 2015.

This case is a reminder to taxpayers that making proper elections for state purposes is imperative. States generally have established rules and regulations for making proper elections that must be followed. With net operating losses, the number of states permitting a net operating loss carryback continues to dwindle. However, there are numerous procedural and practical differences amongst these few remaining carryback states that need to be evaluated whenever there is a state loss.

Key items to consider:

  • Is there a carryback limitation for the state?
  • If a federal net operating loss exists, does the state follow the federal election? (only applicable to years when the loss could be carried back federally)
  • In a separate company filing state, if there is a federal net operating loss for a consolidated group that includes a company with a net operating loss filing in that state, can different elections regarding the carryback be made? (only applicable to years when the loss could be carried back federally)

If properly elected and applied, the difference between a taxpayer’s choice to carryback or forego the carryback would just be the timing of the benefits from net operating loss deductions (assuming the entire loss is used under either scenario.) The decision did not provide all of the details, but we do know that the elimination of the net operating loss deduction in 2015 resulted in an assessment for that year. The issue for this taxpayer is that the net operating losses should have been used in an earlier tax year and refunds for that year are barred by the statute of limitations. By failing to make a proper election to forego the carryback, the taxpayer cost themselves the tax value of the net operating loss in Virginia.

There could be a price to pay for not following the appropriate procedures for making elections.

Contact our State Income and Franchise Tax team to learn more about our services, and how we can help your company maintain compliance with your filings.