Quick Tax Relief for Clients with Net Operating Losses
The Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92) extends and expands a provision enacted early in 2009 that allowed certain small businesses to maximize their refunds from a 2008 net operating loss (NOL). The new law extends the refund provision to 2009 NOLs and expands its scope to cover almost all businesses.
Looking Up? Your clients who were ineligible for the earlier refund provision may now qualify for a quick cash infusion. Clients who were eligible for the earlier provision may now qualify for additional refunds.
A Little Background: Prior to the New Law
Generally speaking, an NOL (the excess of business deductions over gross income) may be carried back two years and carried forward 20 years to offset taxable income in those years. NOLs offset taxable income in the order of the taxable years to which the NOL may be carried.
How It Has Worked: A business can claim a refund for the carryback years by filing amended returns for those years (Form 1040X for individuals, Form 1120X for corporations). In the alternative, a business can file for a “quickie” refund by applying for a “tentative carryback adjustment” on Form 1045 (individual) or Form 1139 (corporation). The IRS must act fast on a claim for a tentative carryback adjustment within 90 days after the date it is filed. A tentative carryback adjustment claim must generally be filed by the end of the year following the year the NOL arises.
The American Recovery and Reinvestment Act of 2009 (ARRA), enacted by Congress last February (P.L. 111-5), contained a special relief provision for “eligible small businesses” (ESBs). At an ESB’s option, the NOL carryback period was increased to three, four, or five years. This provision, in turn, increased the chances that an NOL could be fully offset in carryback years (generating immediate refunds) instead of the ESB having to carry the NOL forward (and wait for tax reductions).
Example: An ESB elected a 5-year carryback period, the NOL would first be applied against the fifth year preceding the NOL year. If the NOL exceeded the fifth year’s taxable income, the excess would be carried forward to the fourth preceding year, and so on until it was exhausted. Only if the NOL exceeded the taxable incomes of the five preceding years would it be carried forward to years after the NOL year.
The special relief provision was available only for an NOL arising in a tax year ending in 2008, or, at the ESB’s election, a tax year starting in 2008. A business qualified as an ESB if it met a $15 million gross receipts test.
New Law Changes
The Worker, Homeownership, and Business Assistance Act generally allows all businesses, not just ESBs, to increase the carryback period to three, four or five years for an “applicable NOL” [IRC Sec. 172(b)(1)(H)]. An applicable NOL is a business’s NOL for a tax year beginning or ending in either 2008 or 2009. Any businesses can file a tentative carryback adjustment claim to get a quick refund from the new law change.
Note: The extended carryback period is not available to TARP recipients and certain other businesses receiving government assistance under the Emergency Economic Stabilization Act of 2008.
Also: The amount of an NOL that may be carried back to the fifth tax year preceding the loss year is limited to 50 percent of taxable income for the fifth year (computed without regard to the NOL).
Only One NOL: Choose Your Carryback Period
A business may generally elect an extended carryback period for only one NOL. So a calendar-year business client with an NOL in both 2008 and 2009 will have to choose the extended carryback period for the year that produces the better tax results. The NOL for the other year will be limited to the regular two-year carryback period. For fiscal-year clients, the choice will be from among the 2007-2008 year, the 2008-2009 year and the 2009-2010 year (assuming there are NOLs in all three years).
One Exception. An ESB that elected the extended carryback period under the original ARRA provision for an NOL from 2008 may choose a second extended carryback period under the new law for an NOL from 2009.
We have prepared a letter you can send to clients explaining this new tax relief provision; see below.
Electing the Extended Carryback Period
The IRS has announced the procedures to be followed to elect the extended carryback period [Rev. Proc. 2009-52, 2009-49 IRB] There are two ways to go about it.
Method 1
A client may make the extended carryback period election by attaching a statement to the original or amended return for the tax year in which the NOL arises. The statement must provide that the client is electing to apply IRC 172(b)(1)(H) under Rev. Proc. 2009-52, and that the client is not a TARP recipient nor, in 2008 or 2009, an affiliate of a TARP recipient. The statement must specify the length of the NOL carryback period the taxpayer elects (3, 4, or 5 years). The election statement must be filed with the return on or before the due date for filing the return for the client’s last tax year beginning in 2009.
A copy of the election statement must be attached to the client’s claim for tentative carryback adjustment (Form 1045 or Form 1139) or to the amended return applying the NOL to the carryback year. The due date for filing a claim for tentative carryback adjustment for the extended carryback period has been extended to the due date (including extensions) for filing the return for the client’s last tax year beginning in 2009.
Method 2
A client may elect the extended carryback period by attaching the statement specified in Method 1 directly to the tentative carryback adjustment claim or to the amended return for the carryback year. Again, the client must file the tentative carryback adjustment claim or amended return on or before the due date (including extensions) for filing the return for the taxpayer’s last tax year beginning in 2009.
Reach Out to Clients
So you can reach out to clients and prospective clients on these expanded benefits for NOL relief, we have prepared a client letter that you can adapt as needed.