The Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"), as signed into law by President Obama Nov. 6, 2009, creates a narrow window of opportunity for taxpayers of all sizes with net operating losses to obtain immediate tax refunds. Pursuant to the Act, a taxpayer with a net operating loss ("NOL") generated in either 2008 or 2009 may elect to carry back the NOL for up to five, instead of the usual two, prior taxable years. This temporary expansion of the NOL carryback rules could mean significant tax refunds for taxpayers who have suffered substantial losses in 2008 or 2009.
Net Operating Losses
A taxpayer has an NOL when, for a given taxable year, its allowable deductions exceed its gross income. Without regard to amendments made by the American Recovery Reinvestment Act of 2009 (the "Recovery Act") and the Act, an NOL may be carried back two taxable years prior to the taxable year of the loss, or carried forward to the 20 years succeeding the loss year. An NOL may be more valuable if it can be carried back to a prior year because it will result in an immediate tax refund. Taxpayers entitled to carry back and carry forward NOLs include C corporations, individuals, and owners of pass-through entities (such as partnerships, limited liability companies and S corporations), who may use their distributive shares to calculate individual or corporate NOLs.
The Recovery Act, which was enacted earlier this year, included a one-time-only expansion of the NOL carryback period by permitting a taxpayer with an NOL generated in 2008 to elect to carry back the NOL for up to five preceding taxable years. However, only small business owners (generally defined as corporations or partnerships with average annual gross receipts of $15 million or less for the three taxable year period ending with the year of the loss) were eligible to make this election. As a result of this limitation, many individuals and larger corporate taxpayers were unable to benefit from this tax relief.
The Act's Changes to the NOL Carryback Rules
Expansion of Taxpayers Eligible for Relief
The Act removes the Recovery Act's restrictions on eligible taxpayers, thus permitting taxpayers of all sizes to recoup taxes paid in prior years by electing to carry back NOLs for up to five taxable years prior to the taxable year of loss. The result is that taxpayers generally may now utilize their net operating losses realized in either 2008 or 2009 to offset earnings aggregated over the five prior years.
Either 2008 or 2009 Losses May Be Carried Back
A taxpayer electing to carry back an NOL pursuant to the Act may do so for an NOL realized during any single taxable year beginning or ending in either 2008 or 2009. The election may only be made for an NOL generated in one of these two taxable years. An exception to this rule is that small businesses that made an election to carry back their 2008 NOL pursuant to the Recovery Act may also make such an election with respect to their 2009 NOL.
Taxable Income That May Be Offset
A taxpayer electing to carry back an NOL pursuant to the Act may utilize an NOL incurred in 2008 or 2009 to offset 100 percent of its taxable income in any of the four taxable years prior to the taxable year of the NOL, and 50 percent of its taxable income in the fifth taxable year prior to the taxable year of the NOL. An exception to this rule is that small businesses that made an election to carry back their 2008 NOL pursuant to the Recovery Act may utilize their NOLs to offset 100 percent of their taxable income for all five taxable years. For those taxpayers subject to the alternative minimum tax, the Act also suspends the rule that limits the NOL carryback to only 90 percent of alternative minimum taxable income. If, after carrying back the NOL to the prior five years, a taxpayer still has a remaining NOL, the taxpayer may carry it forward for 20 taxable years.
Ineligible Businesses
Those taxpayers that participated in the Troubled Asset Relief Program (known as "TARP"), and certain affiliates of such taxpayers, are not eligible for the Act's NOL carryback relief.
Election and Action
In order for a taxpayer to take advantage of the Act's NOL carryback rule, it must make an irrevocable election by the due date (including extensions) for filing the tax return for the taxpayer's last taxable year beginning in 2009. The IRS has indicated that guidance will be forthcoming regarding the manner in which a taxpayer may amend its previously filed 2008 tax return in order to make the election. It is expected that the guidance will be similar to the rules issued earlier this year for small businesses making the NOL carryback election under the Recovery Act.
Next Steps
Taxpayers should consult their tax advisors regarding year-end planning opportunities that maximize their 2009 NOL so they can recoup the maximum amount of taxes paid over the past five taxable years. Because only a narrow window of opportunity exists, it is important that taxpayers contact their tax advisors immediately. In addition, taxpayers may need to conduct a multi-year analysis to determine whether the election should be made with respect to a NOL generated in 2008 or 2009, and whether the election should be for a three-, four- or five-year carryback period.
If you have questions or would like additional information on the NOL carryback election under the Act, please contact one of the authors listed below, or the Reed Smith attorney with whom you regularly work.
To ensure compliance with Treasury Department regulations, we inform you that, unless otherwise indicated in writing, any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or applicable state and local provisions, or (2) promoting, marketing or recommending to another party tax-related matters addressed herein.
This article is presented for informational purposes only and is not intended to constitute legal advice.
