Net Operating Losses and the American Recovery and Reinvestment Act of 2009
Just as tax season is rolling and your CPAs are knee-deep in tax returns, the American Recovery and Reinvestment Act of 2009 (ARRA 2009) changed the NOL carryback rule for net operating losses arising from an eligible small business in 2008.
Warning: This is a change for this tax season
Longer Carryback Period Available
The new law provides an eligible small business with an election to increase the present-law carryback period for an applicable 2008 NOL from 2 years to any whole number of years elected by the taxpayer that is more than 2 and less than 6 (§172(b)(1)(H)(I)). Thus, a 2008 NOL can be carried back 2 years to 2006 (same as old law) or it can be carried back to 2003, 2004, or 2005, whichever the taxpayer elects.
Example: Sharon’s 2008 Form 1040 shows a $35,000 NOL arising from her sole proprietorship, a business that grossed $200,000 in 2008. Sharon had no taxable income in 2005 or 2006. She had a great year in 2004. Sharon can elect to carryback her 2008 NOL to 2004 (or to 2003 if that carryback produces a higher refund).
Election to Waive Carryback Still Available
The taxpayer may still elect to waive the carryback and carry the 2008 NOL forward for 20 years ((§172(b)(3)).
An Eligible Small Business
An eligible small business is defined in §448(c) (except $15,000,000 replaces $5,000,000). Thus, a business with average annual gross receipts for the prior 3 years of less than $15,000,000 is eligible for the new carryback periods (§172(b)(1)(H)(iv)).
Applicable 2008 NOL
An “applicable 2008 NOL” means the NOL for an eligible small business for any taxable year ending in 2008. At the taxpayer’s election, an applicable NOL can be one arising for any taxable year beginning in 2008. Thus, the NOL arising from a C corporation’s fiscal year ending January 31, 2008, as well as a C corporation’s fiscal year ending November 30, 2009, may qualify for the new carryback periods (§172(b)(1)(H)(ii)).
For an NOL for a taxable year ending before the enactment of the provision (for example, an NOL arising from a C corporation with a fiscal year ending January 31, 2008), the law includes the following transition rules:
1) any election to waive the carryback period under either §172(b)(3) with respect to such loss may be revoked before the applicable date;
2) any election to increase the carryback period under this provision is treated as timely made if made before the applicable date; and
3) any application for a tentative carryback adjustment under §6411(a) with respect to such loss is treated as timely filed if filed before the applicable date.
For purposes of the transition rules, the applicable date is the date that is 60 days after the date of the enactment of the provision.
Example: TAX Inc., and eligible small business, had a $50,000 NOL from its fiscal year ending January 31, 2008. It carried back the NOL to its tax returns for the years ending January 31, 2006, and January 31, 2007, but was only able to use $10,000 of the of the January 31, 2008, NOL. It may revise its carryback if it does so within 60 days of enactment and elect to use the NOL on its January 31, 2003, January 31, 2004, and/or January 31, 2005, returns.
Tax Season Warnings – Things you CPA should do NOW
- STOP and reconsider any decision to elect to waive the carryback period. This may have seemed automatic to them for some clients, but now they need to look at the prior 5 years’ returns to determine if a carryforward is the right decision.
- STOP and reconsider any carryback of the C corporation NOL to the second prior year. It’s easy for them to prepare the Form 1139 carryback as they are preparing the 2008 Form 1120. They need to revise their office procedure (and slow down). They must look at the 5 prior years’ tax returns. Maybe another year gives a better tax benefit for the NOL.
- STOP and find the time to look at any fiscal year returns. They probably only have until April 16 or 17 to revise the NOL carryback for those clients.