New NOL Carryback Provision May Put Money in Your Pocket
November 12, 2009
On Friday, November 6, President Obama signed H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009.” The legislation includes a provision on net operating loss carrybacks that can put money in the pockets of formerly profitable businesses that are suffering in the current economic downturn.
As a general rule, net operating losses (NOLs) can be carried back two years and carried forward 20 years to offset taxable income in those years. However, earlier this year, the American Recovery and Reinvestment Tax Act of 2009 provided an “eligible small business” an election to carry back a net operating loss generated in 2008 for up to 5 taxable years in order to obtain a refund of income taxes previously paid in those years. An eligible small business is defined as a taxpayer with less than $15 million in gross receipts.
The new provision signed into law last week similarly provides an election to increase the present-law carryback period from two years to up to 5 taxable years. Highlights of the new carryback provision are:
The extended carryback provision is available to most taxpayers (other than many TARP recipients), in addition to the eligible small businesses covered by the prior legislation.
The taxpayer may elect to carryback an NOL for a taxable year beginning or ending in either 2008 or 2009. The election, however, may be made for only one of those years. However, an eligible small business that elected to carry back a 2008 NOL can also carryback a 2009 NOL under the new provision.
The new act suspends the 90-percent limitation on the use of any alternative tax NOL deduction attributable to carrybacks of the applicable NOL for which an extended carryback period is elected.
Life insurance companies may elect to carry back either 2008 or 2009 loss from operations up to 5 years rather than the 3 years permitted under current law.
The amount of NOL that can be carried back to the 5th taxable year before the loss year is limited to 50% of the taxable income for that 5th taxable year. Any remaining NOL can be carried to the remaining eligible carryback and carryforward years until used.
Example. Assume a corporation has a $10 million NOL in its taxable year which ended September 30, 2009. In its taxable year it had $8 million of taxable income. The corporation may elect to carryback the 2009 NOL to the 2004 tax year. Only $4 million of the 2009 NOL (50% of the 2004 taxable income) can be applied against the 2004 taxable income. The remaining $6 million however can be applied against the corporation’s taxable income in years that ended September 30, 2005, 2006, 2007 and 2008 and then to taxable years ending after 2009.
The election to use the extended carryback provision must be made by the extended due date for filing the return for the taxpayer’s taxable year beginning in 2009. Guidance on procedures for making the election will be forthcoming but it is anticipated that the procedures will be substantially similar to those prescribed for eligible small businesses under the law, in effect, prior to this new amendment.
For more information, please contact Bill Joseph at (404) 685-4282 or wjoseph@burr.com, or Ed Brown at (404) 685-4292 or ebrown@burr.com , or the Burr & Forman attorney with whom you regularly work.
by: William M. Joseph, Edward H. Brown
topics: Tax Law