In December 2018, the Kentucky Department of Revenue released a proposed regulation regarding the treatment of net operating losses (NOLs) as modified by tax reform legislation enacted in April 2018 (see Tax Alert 2018–0911). Among other changes to Kentucky's tax system, the legislation adopted mandatory combined reporting for tax years beginning on or after January 1, 2019. It also provided an eight-year elective consolidated option based on the membership of the taxpayer's federal consolidated group.

The new combined reporting regime significantly altered Kentucky's treatment of NOLs. Under the prior nexus consolidated regime, Kentucky NOLs were computed on a pre-apportionment basis and could be shared among members of the nexus consolidated group, subject to the 50% income limitation. Under the new law, NOLs will be computed on a post-apportionment basis with no sharing among members of the combined group and also subject to the 80% limitation as Kentucky did not decouple from the federal limitation adopted in the Tax Cuts and Jobs Act (P.L. 115-97).

The proposed regulation amends existing 103 Kentucky Administrative Rule 16:250 and is intended to provide guidance on how to convert pre-apportioned NOLs from a nexus consolidated return to post-apportioned NOLs to be used on either a mandatory combined, elective consolidated, or separate company return. The proposed regulation sets forth the steps for a nexus consolidated filer to determine the NOLs to be carried into either a combined, elective consolidated, or separate return and sets forth several numerical examples to guide taxpayers in making these computations.

Implications

This regulatory impact analysis expressly indicates that the regulation is intended to align regulatory guidance with long-standing Kentucky Department of Revenue procedures and policies for allocating NOLs to group return members upon exiting the nexus consolidated group. Given that expressly stated intent, companies should consider the impact of the proposed regulation for ASC 740 purposes as of December 31, 2018.

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