In a Corporate Net Income Tax (“CNI”) appeal filed by Nextel Communications of the Mid-Atlantic, Inc. (“Nextel”), the Commonwealth Court will consider whether Pennsylvania’s statutory cap on net operating loss (“NOL”) deductions violates the Uniformity Clause of the Pennsylvania Constitution. Nextel has asserted that the NOL cap violates the Uniformity Clause because the cap produces “progressive” effective tax rates and improperly subjects companies with larger amounts of income to a higher effective tax rate. Briefing has been completed, and oral argument in the Nextel case has tentatively been scheduled for the Commonwealth Court’s September session in Harrisburg.
Pennsylvania’s CNI statute permits taxpayers with net operating losses to carry over those “net losses” to reduce taxable income in future tax years. See 72 P.S. § 7401(3)4.(b), (c)(2)(A). However, the amount of the NOL deduction that may be taken in a particular year is currently subject to both a “flat dollar cap” and a “percentage-based cap.” For the 2014 tax year, for example, the NOL deduction was limited to the greater of $4 million or 25% of a taxpayer’s taxable income. See 72 P.S. § 7401(3)4.(c)(1)(A)(V). Corporate taxpayers with Pennsylvania income less than the dollar cap are able to reduce their taxable income (and tax) to zero due to the NOL deduction. However, corporate taxpayers with income over the NOL dollar cap are entitled to offset only a portion of their taxable income for a given year through the NOL deduction, regardless of the amount of unused losses incurred in prior years that are otherwise available to be carried forward for CNI purposes.
The pending court appeal involves Nextel’s 2007 Corporate Net Income Tax liability. The record reflects that 314 larger taxpayers had their NOL deductions limited for that year due to the statutory cap, and that 234 of those taxpayers could have reduced their Pennsylvania taxable income to zero, but for the NOL cap. In contrast, over 19,000 other corporate taxpayers, whose Pennsylvania taxable income was less than the NOL dollar cap of $3,000,000 and had net losses that exceeded their income, were able to offset their entire 2007 taxable income through the NOL deduction.
Corporations that have not already done so should consider filing protective CNI refund petitions for years for which the statute of limitations is still open if they have unused net loss deductions in excess of the NOL cap for prior years.