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NOLs: Revive Them, Increase Them, Extend Them TeleStrategies Communications Taxation May 15, 2015 Kenneth R. Levine klevine@reedsmith.com 215.851.8870 Overview New Jersey Pennsylvania California Illinois

SLIDE 1

TeleStrategies Communications Taxation May 15, 2015

NOLs: Revive Them, Increase Them, Extend Them

Kenneth R. Levine klevine@reedsmith.com 215.851.8870

SLIDE 2

Overview

§ New Jersey § Pennsylvania § California § Illinois § Massachusetts § Ohio § Texas

www.reedsmith.com/statetax

SLIDE 3

New Jersey § For pre-2002 NOLs:

ü Use 11 years instead of 7 ü For 2002–2004 NOLs, get up to 3 more years

§ For taxpayers with federal R + D credits

ü 17-year carryover period ü NOLs generated in 1999–2001

www.reedsmith.com/NJtax

SLIDE 4

New Jersey

www.reedsmith.com/NJtax

SLIDE 5

New Jersey Dividend Absorbs NOL § Dividend absorption: Dividends absorb NOLs § Unitary business rules still apply:

ü If payor isn’t unitary, then don’t absorb ü Foreign dividends often not unitary ü Test for unitary-ness when E&P generated not when dividend is paid

www.reedsmith.com/NJtax

SLIDE 6

PA’s Net Loss Cap

Cap is the greater of: ü 2009: $3m or 15% ü 2010–2013: $3m or 20% ü 2014: $4m or 25% ü 2015: $5m or 30% § Reed Smith: cap is unconstitutional

www.reedsmith.com/PAtax

SLIDE 7

Amidon v. Kane

Different effective tax rates: unconstitutional

3.50% nominal flat rate www.reedsmith.com/PAtax

SLIDE 8

PA’s Net Loss Cap

Different effective tax rates: unconstitutional

www.reedsmith.com/PAtax

SLIDE 9

Refund Claim

§ Three-year statute of limitations:

ü 2013 ü 2012 ü 2011 (+ “April 15 v. extended filing” issue) ü + unfavorable RARs ü + any open PA audits

§ What to expect?

www.reedsmith.com/PAtax

SLIDE 10

California

(general rules; calendar years)

§ Loss years 2000–2007:

ü No carryback ü Carryforward = 10 years ü 1987–2003 carryforward limited to a percentage of total NOL

§ Loss years 2008–2012

ü No carryback ü Carryforward = 20 years

§ Loss years post-2012

ü 2-year carryback (subject to percentage limitations in 2013 and 2014) ü Carryforward = 20 years

§ Suspension of deductibility

ü 2002–2003 ü 2008–2011 ü Carryforward period extended for deductions disallowed

www.reedsmith.com/CAtax

SLIDE 11

California NOL Extensions § Six more years! § Legal Ruling 2011-04

ü Ruling: extension requires income in suspension year ü That requirement is not in the statute

www.reedsmith.com/CAtax

SLIDE 12

Illinois

§ NOL suspension 2011–2014

ü No deduction = y/e after 12/31/10 and prior to 12/31/12 ü $100k cap = y/e on or after 12/31/12 and prior to 12/31/14

SLIDE 13

Illinois

§ Issues:

ü Fiscal-year taxpayers treated worse ü Suspension applies only to NOLs generated after 2002 ü $100k cap unconstitutional

SLIDE 14

Massachusetts “Years” Means “Years” § Pre-2010 NOLs

ü Statute: NOLs carryforward 5 “years” ü Regulation: NOLs carryforward 5 “taxable years”

§ Reed Smith: “years” has ordinary meaning —12 months

ü “Taxable years” is a defined term ü Legislature didn’t use it

www.reedsmith.com/MAtax

SLIDE 15

Massachusetts Short Period Taxpayers

www.reedsmith.com/MAtax

SLIDE 16

NOLs Useless? Reduce gain instead

§ Taxpayers who should be interested:

ü Recognize gain in NOL suspension years ü Recognize gain on property depreciated during restricted NOL carryover years ü Recognize gain on property placed in service before earliest loss year

§ Solution:

ü Increase basis for prior-period deductions that did not produce tax benefit ü Authority: Boeddeker (CA), Toyota (NJ)

www.reedsmith.com/CAtax

SLIDE 17

Ohio―The CAT Credit

§ Solution = Credit based on value of DTAs

ü Only TPs with ≥ $50MM unused NOLs ü Must report “amortizable amount” by 6/30/06 ü Credit spread over 20 years (2010–2030) ü Subsequent changes to NOLs, DTAs?

§ Dana Corp. case

§ Problem = NOLs booked as DTAs,

but the franchise tax was going away

SLIDE 18

Texas―Business Loss Credit

§ Credit = unused losses as of 1/1/08 x 4.5% § 2.25%/yr. for 10 yrs.; then 7.75%/yr. for 10 yrs. § Elect credit each year?

ü Statute v. Regulation ü Original or extended due date? ü Required to pay by EFT?

§ Changes to combined group may jeopardize credits

SLIDE 19

TeleStrategies Communications Taxation May 15, 2015

NOLs: Revive Them, Increase Them, Extend Them

Kenneth R. Levine klevine@reedsmith.com 215.851.8870

Overview

§ New Jersey § Pennsylvania § California § Illinois § Massachusetts § Ohio § Texas

New Jersey § For pre-2002 NOLs:

ü Use 11 years instead of 7 ü For 2002–2004 NOLs, get up to 3 more years

§ For taxpayers with federal R + D credits

ü 17-year carryover period ü NOLs generated in 1999–2001

New Jersey

New Jersey Dividend Absorbs NOL § Dividend absorption: Dividends absorb NOLs § Unitary business rules still apply:

ü If payor isn’t unitary, then don’t absorb ü Foreign dividends often not unitary ü Test for unitary-ness when E&P generated not when dividend is paid

PA’s Net Loss Cap

Cap is the greater of: ü 2009: $3m or 15% ü 2010–2013: $3m or 20% ü 2014: $4m or 25% ü 2015: $5m or 30% § Reed Smith: cap is unconstitutional

Amidon v. Kane

Different effective tax rates: unconstitutional

PA’s Net Loss Cap

Different effective tax rates: unconstitutional

Refund Claim

§ Three-year statute of limitations:

ü 2013 ü 2012 ü 2011 (+ “April 15 v. extended filing” issue) ü + unfavorable RARs ü + any open PA audits

§ What to expect?

California

(general rules; calendar years)

§ Loss years 2000–2007:

ü No carryback ü Carryforward = 10 years ü 1987–2003 carryforward limited to a percentage of total NOL

§ Loss years 2008–2012

ü No carryback ü Carryforward = 20 years

§ Loss years post-2012

ü 2-year carryback (subject to percentage limitations in 2013 and 2014) ü Carryforward = 20 years

§ Suspension of deductibility

ü 2002–2003 ü 2008–2011 ü Carryforward period extended for deductions disallowed

California NOL Extensions § Six more years! § Legal Ruling 2011-04

ü Ruling: extension requires income in suspension year ü That requirement is not in the statute

Illinois

§ NOL suspension 2011–2014

ü No deduction = y/e after 12/31/10 and prior to 12/31/12 ü $100k cap = y/e on or after 12/31/12 and prior to 12/31/14

Illinois

§ Issues:

ü Fiscal-year taxpayers treated worse ü Suspension applies only to NOLs generated after 2002 ü $100k cap unconstitutional

Massachusetts “Years” Means “Years” § Pre-2010 NOLs

ü Statute: NOLs carryforward 5 “years” ü Regulation: NOLs carryforward 5 “taxable years”

§ Reed Smith: “years” has ordinary meaning —12 months

ü “Taxable years” is a defined term ü Legislature didn’t use it

Massachusetts Short Period Taxpayers

NOLs Useless? Reduce gain instead

§ Taxpayers who should be interested:

ü Recognize gain in NOL suspension years ü Recognize gain on property depreciated during restricted NOL carryover years ü Recognize gain on property placed in service before earliest loss year

§ Solution:

ü Increase basis for prior-period deductions that did not produce tax benefit ü Authority: Boeddeker (CA), Toyota (NJ)

Ohio―The CAT Credit

§ Solution = Credit based on value of DTAs

ü Only TPs with ≥ $50MM unused NOLs ü Must report “amortizable amount” by 6/30/06 ü Credit spread over 20 years (2010–2030) ü Subsequent changes to NOLs, DTAs?

§ Dana Corp. case

§ Problem = NOLs booked as DTAs,

but the franchise tax was going away

Texas―Business Loss Credit

§ Credit = unused losses as of 1/1/08 x 4.5% § 2.25%/yr. for 10 yrs.; then 7.75%/yr. for 10 yrs. § Elect credit each year?

ü Statute v. Regulation ü Original or extended due date? ü Required to pay by EFT?

§ Changes to combined group may jeopardize credits

Reed Smith LLP – State Tax Practice