Posted on November - 10 - 2009
New Law Extends and Expands NOL Carryback Provisions
On November 6, 2009, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548), extending and enhancing a popular but temporary tax incentive — the five-year net operating loss (NOL) carryback provisions.
Under the new law, the expanded five-year NOL carryback, which was originally available to qualifying small businesses for their years beginning in 2008, has been extended and enhanced to include 2009 NOLs for nearly all businesses, regardless of size. Qualifying small businesses that utilized the five-year carryback provisions for their 2008 tax year may also take advantage of the five-year carryback provisions for 2009.
The availability of quick refunds from 2008 and 2009 NOL five-year carrybacks should be a huge boost to businesses trying to survive the recession, since the refunded cash can be used to pay expenses, maintain operations and make new investments.
The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) allowed eligible small businesses (with average gross receipts of $15 million or less) to elect to carry back NOLs from 2008 for three, four or five years rather than the standard two years. The new law expands this to provide a similar election to all U.S. businesses. Therefore, any U.S. business, regardless of size, can now carry back 2008 or 2009 NOLs up to five years.
However, the new law imposes a 50-percent income limit on NOL offsets in the fifth preceding tax year. This means that NOLs carried back five years are limited to 50-percent of the available taxable income for that year. Any remaining NOL can then be used to fully offset taxable income in the other four carryback years.
Example: ABC Company has profits of $5 million each year from 2004 through 2008. For 2009, ABC has a net operating loss of $10 million. ABC can elect to carry back the 2009 NOL five years to 2004 and subsequent years. For 2004, ABC can claim an NOL deduction of 50 percent of its 2004 taxable income, or $2.5 million. The NOL balance of $7.5 million can be used to fully offset ABC’s 2005 income of $5 million. The remaining NOL of $2.5 million can then be deducted against 2006 income thus fully utilizing the NOL.
This limitation does not apply to eligible small businesses that elected to carry back 2008 NOLs under the 2009 Recovery Act, but the limitation will apply if those businesses have 2009 NOLs. The election provided under the new law, is available for NOLs incurred in either 2008 or 2009, but not for both years, except where an eligible small business previously elected under the 2009 Recovery Act to carryback 2008 NOLs. In such instances, the qualified small business may make the election for an additional year, enabling that business to carry back NOLs from both 2008 and 2009 for up to five years.
The election to utilize the new five-year NOL carryback provision must be made by the due date (including extensions) of the tax return filed for the taxpayer’s last taxable year beginning in 2009. The election is irrevocable; however, if a taxpayer had previously elected not to carry back an NOL from a tax year ending before the date of enactment of the new law, then that taxpayer may revoke that election before the due date (including extensions) for filing the taxpayer’s 2009 return.
The election is available for a tax year ending after December 31, 2007, and beginning before January 1, 2010. Therefore, a fiscal year taxpayer can make the election for tax years beginning or ending in either 2008 or 2009.
The alternative minimum tax (AMT) is also affected by the new law, which suspends the 90-percent income limitation on the use of NOLs for determining AMT for an extended carryback year.
To learn more about how your business can benefit from these new provisions, please do not hesitate to contact your Cherry, Bekaert & Holland, L.L.P. advisor.
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