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Extended Net Operating Loss (NOL) Carryback Provisions Signed into Law

Taxpayers may be eligible to carryback losses up to five tax years

On Nov. 6, 2009, H.R. 3548, the Worker, Homeownership and Business Assistance Act of 2009, was signed into law (the Act). The Act amended IRC section 172(b)(1)(H), providing taxpayers with an extended net operating loss (NOL) carryback period. Unlike the carryback provisions included in the American Recovery and Reinvestment Act of 2009, which limited the extended carryback to certain small businesses, the Act expands the extended carryback period to any taxpayer who incurred a net operating loss in a year ending in 2008 or 2009.

Since the Act applies to NOLs generated in years ending after Dec. 31, 2007 and through Dec. 31, 2009, taxpayers should analyze their current federal income tax position in order to optimize any NOLs generated in 2009. In particular, income deferral and expense acceleration opportunities should be considered to help increase the current year NOL eligible for carryback to profitable years.

Background
Typically, taxpayers are allowed to carryback an NOL to the previous two years. As amended, IRC section 172(b)(1)(H) extends the carryback period to five years for taxpayers incurring losses in tax years ending after Dec. 31, 2007 and beginning before Jan. 1, 2010.

The table below highlights the significant changes in this new legislation. We recommend you take steps to consult with your tax advisor to assess the specific tax implications to you and your business.


Guidance on Claiming Extended Carryback Losses

Which taxpayers are eligible for the extended carryback?
  • The extended carryback is eligible to virtually any taxpayer who generates an NOL in a tax year ending after Dec. 31, 2007 and beginning before Jan. 1, 2010.
  • However, TARP recipients or members of a consolidated group that includes a TARP recipient are not eligible for the extended carryback.
  • Eligible taxpayers are required to affirmatively elect the year (i.e., 2008 or 2009) that the taxpayer is applying the extended carryback. 
  • A business must make the irrevocable election by the extended due date of the tax return for its last taxable year beginning in 2009.
For what year can the election be made?
  • A calendar-year taxpayer can elect for the calendar 2008 or 2009 tax year.
  • A fiscal-year taxpayer can elect either for its fiscal year ending in 2008, its fiscal year beginning in 2008 and ending in 2009, or its fiscal year beginning in 2009. 
  • The election is only allowed for a single taxable year.
What is the extended carryback period?

A taxpayer may elect to carryback an NOL up to five years.

  • Carrybacks to the fifth tax year are limited to 50 percent of taxable income. 
  • Carrybacks to the prior four years are eligible to offset 100 percent of taxable income.
Did the Act change the utilization of an alternative minimum tax (AMT) NOL carryback?

Yes, the Act provides a favorable change to the utilization of the AMT NOL carryback.

  • The Act eliminates the 90 percent limitation on the use of any alternative tax NOL deduction; thereby allowing an AMT NOL to fully offset alternative minimum taxable income in the carryback year.
Does the Act include special provisions for small businesses?

Yes, an Eligible Small Business (ESB) may be eligible for the extended carryback for NOLs incurred in 2008 and 2009.

  • ESBs are defined as businesses that have an average of less than $15M in gross receipts over the three-year period ending with the year giving rise to the loss (i.e., the taxable year in which the NOL arose is the last taxable year of the three-year period to which the test is applied).
  • ESBs include S corporations, partnerships and sole proprietorships, as well as C corporations. 
  • Shareholders or partners of ESBs.
Does the Act suspend provisions that would otherwise limit the ability to carryback NOLs?

No, general limitations within the Code remain applicable, such as:

  • Section 172(h) Corporate Equity Reduction Transaction rules, which may limit the ability to carryback NOLs attributable to interest deductions following a business acquisition, leveraged buy-out or redemption. 
  • Section 382(h)(4), which may limit the ability to carryback built-in losses and deductions incurred as a part of a larger NOL.
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