In Nextel Commc’n of the Mid-Atl. Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017), the Supreme Court of Pennsylvania held that the Net-Loss-Carryover Provision (“NLC”) in the revenue code was prohibited as applied to corporate taxpayer by the Uniformity Clause but severing the $3 million dollar flat dedication from the provision was the appropriate consequence. In 2007, when the case began, the Pennsylvania Revenue Code provided that “a corporation could carry over losses as deductions equal to the greater of 12.5% of the corporations taxable income or $3 million. As a result, a business that had a net income less than $3 million was paying no corporate income tax while larger businesses were paying hefty corporate income taxes. Because the NLC was structured to assess a corporation’s tax liability on the basis of the value of a corporation’s taxable income, in operation, the NLC enabled the majority of corporations with taxable income (98.8% of eligible companies) to avoid paying any taxes at all in 2007.
The Court determined that the NLC was unconstitutional as written because of its inclusion of the $3 million flat deduction, the Court saw three available options: “(1) sever the flat $3 million deduction from the remainder of the NLC; (2) sever both the $3 million and 12.5% deduction caps and allow corporations to claim an unlimited net loss—the remedy chosen by the Commonwealth Court majority; or (3) strike down the entire NLC and, thus, disallow any net loss carryover.” Out of the three options available, the Court determined that severing the $3 million flat deduction from the NLC was the best option. Therefore, small corporations will not be able to deduct carried-forward operating losses from their taxable income.