Yesterday, Governor Sherrill signed her first budget bill into law. Along with the budget bill, New Jersey enacted legislation partially suspending net operating losses for tax years 2026 through 2029.
Summary of Changes and Practical Considerations:
- The $1 Million Cap. For privilege periods ending on or after July 31, 2026 and before July 31, 2030, a taxpayer’s apportioned net loss deduction cannot exceed $1 million.1 This cap applies to pre-combination losses (PNOLs) and post-combination losses (NOLs) in the aggregate. That is, the maximum deduction is $1 million across PNOLs and NOLs combined.
- Extended Carryover Period. To the extent NOL deductions are reduced or disallowed, taxpayers will receive six additional carryover years. Note that when New Jersey last suspended its NOL deduction for 2002–2005,2 the carryover provisions spurred numerous appeals and litigation.3 The 2026–2029 suspension could generate similar controversy.
- Public Utility Exemption. The NOL cap does not apply to public utilities. Public utilities can continue to claim NOL deductions without limitation during the cap period.4
- Proration for Short Tax Years. For tax years less than 12 months, the cap is prorated based on number of months. For example, if a taxpayer’s return covers only six months, the cap is reduced by half to $500,000.
- Phase-Out Period for 2030 and 2031 Tax Years. For tax years ending between July 31, 2030 and July 31, 2032, the NOL deduction cannot reduce a taxpayer’s apportioned income by more than 75% (as opposed to the current limit of 80%).5
- Estimated Tax Penalty Relief. The Bill contains a safe harbor for underpayments of estimated tax installments due between December 31, 2025, and January 1, 2027, to the extent the underpayment results from the NOL cap limitations.6
1. A. 5322, 222nd Leg., Reg. Sess. (N.J. 2026) (hereinafter cited as “A5322”). The companion bill is S4536. Both bills, on final passage from the legislature, were identical.
2. 2002 N.J. Laws 40 (known as the Business Tax Reform Act or “BTRA”).
3. The prior NOL suspension was subject to multiple rounds of litigation. See, e.g., Fifth Third Equip. Fin. Co. v. Dir., Div. of Taxation, 32 N.J. Tax 217 (2021).
4. A5322, Sec. 1.b.
5. A5322, Sec. 1.c.
6. A5322, Sec. 1.f.
Newsflash 2026-143