Two leading members of the Senate recently introduced a bill that would substantially expand the carryback period for net operating losses. As discussed in greater detail below, this legislation, if enacted into law, could provide a significant boost and provide relief for many businesses that are struggling in the current economy.
A net operating loss ("NOL") generally may be carried back two years and carried forward twenty years, thereby allowing taxpayers to reclaim taxes paid in profitable years. An NOL carryback, therefore, can be a valuable tool for businesses to generate additional funds during challenging times.
In response to the massive job losses resulting from the ongoing financial crisis, the American Recovery and Reinvestment Act of 2009 (the "ARRA") included a provision to extend the NOL carryback period to up to five years for NOLs incurred in 2008. As noted above, the rationale underlying this provision was that an extended carryback period would generate additional (and immediate) funds for businesses and thus prevent further job losses. The ARRA provision, however, applies only to an "eligible small business," which is defined narrowly as a taxpayer with average annual gross receipts of less than $15 million during the prior three taxable years. A taxpayer that does not satisfy this gross receipts test is limited to the existing two-year carryback period. Thus, the NOL carryback provision under the ARRA will be unavailable to many distressed taxpayers that are in desperate need of its benefits.
Many members of the business community expressed dissatisfaction (and, in some cases, outrage) over the limited scope of the ARRA legislation, especially in light of the fact that the House and Senate versions of the stimulus bill would have extended the carryback period to five years, without the limitation for small businesses contained in the final version of the bill. Congress ultimately scaled back the ARRA provision to include the gross receipts test due to concerns over the cost of the massive stimulus package (the House and Senate versions of the legislation would have cost in excess of $17 billion over ten years, whereas the provision as enacted would cost less than $1 billion over the same time period).
As a result of this criticism, as well as the continued distressed state of the economy, Senate Finance Chairman Max Baucus (D–Montana) and Senator Olympia Snowe (R-Maine) introduced Senate Bill 823 on April 2, 2009. This bill, entitled the "Net Operating Loss Carryback Act," would extend the NOL carryback period to five years for losses incurred in 2008 and 2009. Unlike the limited NOL carryback provision under the ARRA, Senate Bill 823 would apply to all taxpayers, irrespective of gross receipts, other than Fannie Mae, Freddie Mac or firms that received financial assistance from the Troubled Asset Relief Program.
Senate Bill 823 appears to be unrelated to the President's proposed budget for fiscal year 2010, which also proposes to expand the NOL carryback period, but offers no further detail. Rather, as noted above, it appears that Senator Baucus and Senator Snowe introduced Senate Bill 823 solely in response to business groups that have called on Congress to take additional measures to prevent additional job losses and more businesses from going out of business.
However, despite the general support for an extended NOL carryback period within the current administration and the business community in general, the fate of Senate Bill 823 is uncertain at best.
We will address Senate Bill 823, as well as other significant tax developments, including a series of recent IRS notices that provide relief from the adverse tax impact that might arise under Section 382 as a result of government efforts to stabilize the financial services industry, in our webinar scheduled for next Tuesday, April 14th at 12:30 p.m.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
