Testimony

Temporary Closure of Corporate “Net Operating Loss” Tax Loophole Will Save State Hundreds of Millions

Permanent changes to corporate tax code are needed to prevent revenue loss when net operating loss suspension ends.

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Published on Jun 28, 2026 in Tax and Budget

Although reasonable in theory, the net-operating-loss deduction has become a substantial tax benefit for large, profitable corporations, which have ballooned the value of net-operating-losses for the top 1 percent of corporations. Offsetting profits with prior losses can help smooth the volatile profit patterns of corporations year over year. But tax planning has allowed some of the world’s largest businesses to accumulate losses on paper year after year, despite growing profits for shareholders.

New Jersey’s program is no different, with roughly $1.2 billion in lost revenue in tax year 2023. That is roughly a quarter of the $4 billion in total corporate business tax collected in fiscal year 2025, when those returns were primarily processed. These lost revenues occurred despite record corporate profits each year.

Many corporations stack these net-operating-losses with other credits and deductions to eliminate their tax liability entirely. Of corporate filers claiming more than $1 million in net-operating-loss tax deductions, almost two-thirds reduced their taxable income to $0. Profitable businesses should not be able to avoid taxation by accumulating paper losses while declaring record profits to their investors. 

NJPP seeks amendments to further cap NOL claims in the privilege period starting July 1, 2030. As written, this bill sets a ticking time bomb of revenue loss for a future fiscal year. Deferring these lost revenues does not fix the fundamental issue of difficult-to-audit paper losses.

Instead, the legislature should consider more permanent changes to rein in net-operating-loss growth beyond the next few years. The broad pattern of net-operating-loss accumulation by large corporations with sophisticated tax planning departments should concern the state as it looks to shore up revenue in years to come. Specifically, the legislature should consider:

  • Reducing the carryforward window from 20 years to a shorter time frame,
  • Reducing the percentage of losses a company can claim to 40 percent of taxable income
  • Capping the overall amount of claimable loss at $1 million permanently.

 

Additional corporate tax reforms including permanent net-operating-loss reform will be necessary to prevent more tax base erosion.

Author

  • Peter Chen, Senior Policy Analyst, has worked on child and family policy advocacy in New Jersey since 2014. Most recently, he coordinated New Jersey’s nonprofit campaign for a complete count of the 2020 Census. Additionally, Peter has written reports on topics including: childhood lead poisoning prevention, chronic absenteeism from school, teacher certification, and summer meals.

    Prior to New Jersey Policy Perspective, Peter was Policy Counsel at Advocates for Children of New Jersey, where he also served as a Skadden Fellow from 2014-16. Peter received his JD from Yale Law School and his Bachelors of Arts from Indiana University-Bloomington. He served as a law clerk for Chief Justice Shirley Abrahamson of the Wisconsin Supreme Court.
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