Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Expansion of five-year carryback election for NOLs in the Worker,
Homeownership and Business Assistance Act of 2009
Dear Reader:
On Nov. 6, 2009, President Obama signed the “Worker, Homeownership,
and Business Assistance Act of 2009” (the 2009 Assistance Act) into
law. In addition to providing an extension of unemployment benefits
for the longtime jobless, the 2009 Assistance Act includes tax
changes for businesses, the most significant of which are
liberalized rules for certain net operating losses (NOLs). I'm
writing to give you an overview of these new NOL provisions. Please
call our offices for details of how the new changes may affect your
business.
Background.
A net operating loss (NOL) is the excess of business deductions
(computed with certain modifications) over gross income in a
particular tax year. The loss can be deducted, through an NOL
carryback or carryover, in another tax year in which gross income
exceeds business deductions. In general, NOLs may be carried back
two years and forward 20 years. The NOL is first carried back to the
earliest tax year for which it's allowable as a carryback or a
carryover, and is then carried to the next earliest tax year. A
taxpayer may elect to forego the entire carryback period for an NOL
and instead carry it forward.
Stimulus legislation passed earlier this year allowed eligible small
businesses (with average annual gross receipts of $15 million or
less for 2006-2008) to elect to carry back NOLs from 2008 for 3, 4
or 5 years rather than the standard 2 years. A taxpayer with a
fiscal year (i.e., other than a calendar year) was entitled to
choose the extended carryback period for the tax year that began or
ended in 2008.
New law.
The 2009 Assistance Act provides an election for most taxpayers (not
just small businesses) to increase the carryback period for an
applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL
means the taxpayer's NOL for any tax year ending after Dec. 31,
2007, and beginning before Jan. 1, 2010. This means the election may
be made for a tax year beginning or ending in either 2008 or 2009.
Taxpayers electing a 5-year carryback can use the NOL to offset up
to 50% of the available taxable income for the 5th tax year
preceding the loss year, and 100% of all taxable income in the
remaining 4 carryback years. The amount of the NOL otherwise carried
to tax years after the 5th preceding tax year is adjusted to take
into account that the NOL could offset only 50% of the taxable
income for the 5th year. That is to say, unlike previous versions of
this proposal which were not included in the final legislation,
there is no “haircut” for the amount by which the NOL is limited in
the 5th preceding year.
In addition, the Act suspends the 90% limitation on the use of an
NOL deduction for alternative minimum tax purposes, for alternative
tax NOLs attributable to carrybacks for which the extended carryback
is elected.
Generally, an extended carryback period election may be made for
only one tax year. However, small businesses that have already
elected an extended carryback for a 2008 NOL may also elect to
extend the carryback for NOLs from 2009.
A similar extended carryback period is available for the loss from
operations of a life insurance company.
The election of an extended carryback period must be made by the due
date (with extensions) for filing the tax return for the taxpayer's
last tax year beginning in 2009. Once made, the election is
irrevocable. If the taxpayer had previously elected to forego the
carryback of an NOL from a tax year ending before Nov. 6, 2009, the
taxpayer may revoke that election before the due date (including
extensions) for filing the taxpayer's 2009 return.
The right to elect an extended carryback period does not apply to
any taxpayer that has received or will receive financial assistance
under the Emergency Economic Stabilization Act of 2008 in the form
of an equity infusion or acquisition of a warrant (or other right).
I hope this information is helpful. If you would like more details
about this or any other aspect of the new law, please do not
hesitate to call.