Illinois Net Operating Loss Limitation for Corporations
Understand Illinois's unique rules for corporate Net Operating Losses, which feature a specific annual deduction limit and distinct calculation methods.
When a corporation’s deductible expenses surpass its revenues in a tax year, it results in a net operating loss (NOL). This loss can be used to offset taxable income in other years, providing tax relief. While federal law has its own regulations for NOLs, states are not required to follow them. Illinois has established a distinct framework for corporate NOLs with rules that differ from federal provisions, impacting how losses are calculated and used.
The Illinois NOL Limitation Explained
Illinois imposes a monetary cap on the NOL amount that can be deducted against taxable income in a single year. For tax years ending on or after December 31, 2021, and before December 31, 2024, the maximum NOL deduction is limited to $100,000 per year. This ceiling applies to the annual deduction, not the total NOL a company can generate. Any unused portion of the NOL can be carried forward to subsequent tax years, subject to the same annual limitation.
This state-level restriction results from Illinois choosing to decouple from certain federal tax changes. For example, Illinois did not adopt the more generous federal NOL provisions temporarily enacted by the 2020 CARES Act. This decision reflects the state’s policy of managing its tax base independently of federal adjustments.
Under Public Act 103-0592, the annual NOL deduction limitation for corporations increases to $500,000. This higher cap applies to tax years ending on or after December 31, 2024, and before December 31, 2027. The change allows corporations to offset more income while maintaining the structure of an annual limitation.
Calculating the Illinois Net Operating Loss
Calculating an Illinois NOL begins with the federal taxable income or loss from U.S. Form 1120. This figure must be adjusted by a series of Illinois-specific addition and subtraction modifications. These adjustments convert the federal amount into the “base income” used for Illinois tax purposes. After applying these modifications, a corporation arrives at its Illinois net operating loss for the year.
Addition modifications increase federal taxable income or decrease a federal loss. A primary example is adding back interest income from bonds issued by other states, which is exempt from federal tax but not Illinois tax. Other additions include the amount of any Illinois income tax deducted on the federal return and any federally deducted dividend income from a foreign corporation.
Subtraction modifications decrease federal taxable income. A significant subtraction is interest income from U.S. Treasury bonds, which is taxable federally but exempt in Illinois. Corporations may also subtract certain dividends from an Illinois-based insurance company and income from operating in a designated high-impact business location. The net result of these modifications determines the Illinois base income or net operating loss.
Carryback and Carryforward Rules
The use of an Illinois NOL is governed by strict timing rules. A defining feature of Illinois’s policy is its prohibition of NOL carrybacks. Unlike federal rules that sometimes allow applying current losses to prior years’ income, Illinois does not permit this for corporations. The loss can only be applied to future tax years through a carryforward.
An Illinois NOL is confined to a specific carryforward period. While the period was previously 12 years, a legislative change extended it. Any net loss that had not expired as of November 16, 2021, now has a carryover period of 20 years. This provides corporations a longer window to use their accumulated losses against future profits.
Losses must be used in the order they were incurred, following a first-in, first-out method. This means a corporation must exhaust the NOL from the earliest loss year before applying losses from a more recent year. This systematic application ensures the oldest available losses are used first, minimizing the risk of their expiration.
Reporting the NOL on Illinois Tax Returns
Reporting an NOL on an Illinois corporate income tax return requires specific forms, primarily Illinois Schedule NLD, the Net Loss Deduction schedule. This form is used to track the accumulation of NOLs and calculate the allowable deduction for the current year, subject to the statutory limitation. A corporation must file the return that generates the loss before it can be claimed on a future return.
When filing a return for a profitable year, a corporation with available NOLs from prior years first completes Schedule NLD. On this schedule, the company details its available NOL carryforwards from each preceding year. The form guides the calculation of the total allowable deduction, ensuring it does not exceed the annual limit.
The calculated net loss deduction from Schedule NLD is then transferred to the main corporate income tax return, Form IL-1120. This deduction is entered on a specific line of the IL-1120, where it reduces the corporation’s base income. This ultimately lowers the taxable income upon which the Illinois corporate income tax is computed.