Farm Net Operating Loss Rules Every Idaho Grower Should Know

The 2017 Tax Cuts and Jobs Act killed the two-year carryback for most businesses. It left the farm carryback in place. That distinction gets lost in general small-business tax coverage, and it matters more than most Idaho and Utah growers realize.

A hard year on a Bingham County potato operation, a drought year on a Twin Falls dairy, or a broken price cycle on a Cache Valley hay operation can generate a farm net operating loss that produces a real refund of prior-year tax. Or, in the right fact pattern, it can carry forward to shelter income that would otherwise be taxed at a higher rate. The rules are technical, the elections have deadlines, and the decision to waive the carryback is not automatic.

What actually changed after TCJA

For non-farm businesses, TCJA repealed the general two-year NOL carryback and imposed an 80% of taxable income limit on NOLs generated in 2018 and later. Farming operations kept the two-year carryback under IRC §172(b)(1)(B). The 80% limit still applies to farm NOLs when they are carried forward, but the carryback year itself is not subject to that limitation for a farm loss.

The CARES Act briefly restored a five-year carryback for NOLs generated in 2018, 2019, and 2020, then that provision expired. Farm NOLs generated in 2021 and later are back on the two-year rule that farmers had before TCJA.

What counts as a farm loss

A farm NOL is the portion of a taxpayer’s total NOL that is attributable to a farming business. That definition is narrower than what shows up on Schedule F. Off-farm income, wage-earner losses, and rental activity that does not qualify as farming are not part of the farm NOL calculation.

The Schedule F loss and the farm NOL are two different numbers. The farm NOL calculation strips out non-farm items and applies the modifications required under §172(d). Idaho growers with off-farm income sources need to separate the farm side of the return before running the carryback math.

The two-year carryback election

By default, a farm NOL carries back two years and any unused portion carries forward indefinitely. The taxpayer can elect to waive the carryback and carry the entire loss forward instead. The waiver is filed with a timely return, including extensions, and once made it is irrevocable for that loss year.

The trade-off is straightforward. The carryback refunds tax at the rate you paid two years ago. Carrying forward shelters income at whatever rate you pay in future years. When rates are moving, or expiring credits or carryforwards would be wasted by a carryback, the waiver has real value.

The 80% of taxable income limit

The 80% limitation only applies to NOLs generated in 2018 and later. For a farm NOL:

• In the carryback year, the 80% limit does not apply. The full farm NOL can offset up to 100% of that year’s taxable income.
• In any carryforward year, the 80% limit does apply. Post-2017 farm NOLs can offset up to 80% of taxable income in the year they are used.

Pre-2018 NOLs that are still being carried forward are not subject to the 80% cap. Farms with older loss carryforwards and newer ones stack them in a specific order under §172.

When waiving the carryback makes sense

Waiving the two-year carryback is worth running the numbers on when:

• The taxpayer expects to be in a higher bracket in future years than the two carryback years.
• Expiring credits or general business credit carryovers would be absorbed by a carryback and lost.
• AMT interactions in the carryback years would blunt the refund.
• The carryback would flow back to a year already under audit or examination.

These are not universal answers. The calculation depends on the actual bracket, credit position, and audit status in each carryback year. A CPA should run the return both ways before the election deadline.

The mechanics of claiming the carryback

A farm NOL is carried back using Form 1045 (Application for Tentative Refund) for a fast refund, or Form 1040-X (Amended Return) for the same result on a longer processing timeline. Form 1045 must be filed within 12 months of the end of the NOL year. Form 1040-X can be filed later but takes months longer to process.

Idaho generally conforms to the federal NOL rules but with its own modifications on the Form 39R adjustment. Utah has its own conformity provisions. Farming operations that file in both states need the analysis run at both the federal and state levels.

This overview is general information, not tax advice for your specific operation. Talk with our farm CPAs about running the carryback and carryforward numbers before the election deadline, and use tax planning for farmers in strong years so the loss year does not catch you flat. Run the numbers with a Cooper Norman advisor before you file.