Philadelphia issues guidance regarding net operating loss carryforwards & impact of CARES Act provisions

The Philadelphia Department of Revenue has issued guidance to confirm that neither the Tax Cuts and Jobs Act of 2017 (“TCJA”), which removed the federal NOL carryback provision and imposed an 80% of income NOL limitation, nor the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which reinstated federal NOL carrybacks and removed the 80% limitation, have any effect on the usage of Philadelphia NOLs. In addition, the department has also issued tax payment relief provisions for taxpayers impacted by the COVID-19 crisis.

Net Operating Losses ("NOLs")

Many state and local jurisdictions have statutes related to the usage of NOLs that do not incorporate the provisions of Internal Revenue Code Section 172.  Often, carrybacks are not allowed, and usage of carryforwards restricted in some manner.  The City of Philadelphia’s Business Income and Receipts Tax (“BIRT”) is an example of how a local jurisdiction’s rules can significantly differ from the federal rules.  The City of Philadelphia taxes the activity of businesses, whether a C corporation, S corporation, partnership, LLC, trust or individual, through the BIRT.  The BIRT is comprised of two taxes, a net income tax and a gross receipts tax, each of which has its own rules and nexus standard.  The BIRT is an entity-level tax with no flow through of income or loss to the owners.

It should be noted that due to the gross receipts tax portion of the BIRT, an entity can still have a BIRT liability in a year in which it has a NOL.

The starting point for the income base of the BIRT is generally federal taxable income for the year, with certain enumerated adjustments.  However, the BIRT does not incorporate IRC 172.   There is no carryback provision, and the carryforward of any NOL is limited to three years.  Usage of the losses in the three-year carryforward period is not restricted by any percentage of income limitation.  As a result, neither the TCJA, nor the CARES Act, have any effect on the usage of Philadelphia NOLs.

Business Recovery Payment Agreement

On July 16, 2020 Philadelphia announced a city business tax payment option, the Business Recovery Payment Agreement, for businesses struggling due to the COVID -19 crisis.  Qualifying businesses may obtain a payment plan that avoids penalties and interest for taxes that were due after March 20, 2020.  Qualifying businesses must not have owed any taxes before that date and will have up to 12 months to pay with no down payment.  To apply for the new payment plan, the city directs businesses to contact them by phone or e-mail.

Mazars Insight

The three-year NOL carryforward provision can present challenges for businesses that either have just started or have suffered in the current economic downturn.   Three years is a relatively short window for usage of NOLs, and the city has recently announced that it will not recognize a NOL if no return is filed for a year in which there is an overall loss and documentation supporting such loss was not retained.  Any NOLs claimed on a BIRT must begin with the filing of a BIRT in a prior year.

Please consult with your Mazars USA tax professional with any questions concerning the Philadelphia BIRT.

July 22, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.