State NOLs Become Priority as the Economy Improves
Recently analyzed financial statements of the Fortune 1000 showed nearly $200 billion in net operating losses (NOLs) sitting on their books.
With economic growth and corporate profitability tracking closely, many corporate tax departments are eager to find ways to preserve cash flow and reduce tax liabilities. A key strategy for this is to use net operating losses (NOLs) to accurately forecast impacts on cash tax, reduce effective tax rate, and improve corporate earnings per share.
Bloomberg BNA, a provider of expert software for tax and accounting professionals, analyzed the financial statements of the Fortune 1000. It was estimated that nearly $200 billion in NOLs were sitting on their books. Federal NOL rules are fairly straightforward making the calculation and use of NOLs on the federal level a manageable task. However, for those charged with the management of state NOLs, the ability to use them to easily offset state income tax liabilities is no easy feat.
State NOL rules are a complex web that varies from state to state. Management of these rules can be an especially painful process, particularly for companies that have multiple entities and file in multiple states. These companies are forced to deal with hundreds or even thousands of returns in a single year. Each entity may require its own NOL tracking schedule, even in group filing states. Tracking NOL generation and utilization can frequently span upwards of a decade or more. In other words, managing state NOLs is a cumbersome, time-consuming task that requires countless hours of tracking, computing, and forecasting.
Bloomberg BNA conducted a survey of 100 finance executives at US-based C corporations across multiple industries. The goal was to understand the complexities and challenges surrounding how corporate tax teams manage their state NOLs, and to become more familiar with issues surrounding state-specific rules regarding carrybacks/forwards, post-apportionment, pre-apportionment, group reporting, suspensions, and limitations.
Here are some of the key survey findings:
- 88% of respondents expect to be moving into profitable years in the near future
- As their key NOL management challenge, 39% of respondents cited “state carryback/forward rules,” 33% cited keeping up with “state NOL tax law changes,” and 30% indicated “state limitations”
- 68% of respondents shared that they use manual spreadsheets to track their NOLs, 33% use databases, and 52% spend one to four weeks annually on spreadsheet and database maintenance
- As their top NOL concern, 37% of respondents ranked "risk of last minute changes;" "data integrity" and "business continuity" tied at 32%; and 29% indicated "the inability to accurately forecast the burndown rate of an NOL asset"
For the full Bloomberg BNA survey results, please access the "Improving Economy Makes State NOLs a Top Priority" white paper.
Management of state NOLs by multistate corporations, with multiple entities is far too complex to navigate and manage manually. As state income tax and specific NOL laws continue to change and grow in complexity, so will their management. As a result, spreadsheets will no longer be the solution of choice, as there is far too much at risk, ranging from manual data entry mistakes, spreadsheet formula errors, and material weakness in Sarbanes-Oxley controls.
BNA State Tax™ Analyzer from Bloomberg BNA delivers the ability to accurately predict NOL impacts. With the latest built-in tax law, it automatically computes the generation and utilization (carrybacks/forwards) of state NOLs across multiple years and scenarios. Only by implementing best practices that automate the tracking, computation, and forecasting of state NOLs, can companies know with certainty that they are leveraging their valuable state NOLs to the fullest extent.