Pennsylvania tax legislation changes include increased NOL deduction limitation

Background

Governor Josh Shapiro signed S.B. 654 (the Legislation) on July 11, 2024, which doubles the net operating loss (NOL) deduction limit and includes additional tax changes for Pennsylvania taxpayers.

NOL deduction increase

The Legislation gradually increases the NOL deduction limitation from 40% of taxable income to 80% for NOLs incurred in a taxable year beginning after Dec. 31, 2024. However, the Legislation still imposes the 40% NOL limitation on NOLs generated prior to Jan. 1, 2025.

Per the Legislation, the NOL percentage limitation is adjusted as follows:

For tax years beginning in 2025:

• The NOL deduction is limited to 40% of taxable income for a net loss incurred in a taxable year beginning prior to Jan. 1, 2025.

For tax years beginning in 2026, the NOL deduction is limited as follows:

• Deduct 40% of taxable income for a net loss incurred in a taxable year beginning prior to Jan. 1, 2025 (pre-2025 losses).
• For a net loss incurred in a taxable year beginning after Dec. 31, 2024, deduct 50% minus the actual percentage of taxable income deducted for pre-2025 losses multiplied by taxable income.

For tax years beginning in 2027, the NOL deduction is limited as follows:

• Deduct 40% of taxable income for pre-2025 losses.
• For a net loss incurred in a taxable year beginning after Dec. 31, 2024, deduct 60% minus the actual percentage of taxable income deducted for pre-2025 losses multiplied by taxable income.

For tax years beginning in 2028, the NOL deduction is limited as follows:

• Deduct 40% of taxable income for pre-2025 losses.
• For a net loss incurred in a taxable year beginning after Dec. 31, 2024, deduct 70% minus the actual percentage of taxable income deducted for pre-2025 losses multiplied by taxable income.

For tax years beginning in 2029 and thereafter, the NOL deduction is limited as follows: