Net Operating Loss Benefits 2009 Taxes
Tax Refunds May Be Available Using Extended NOL Carryback
By Shelly A. Ashmore, CPA, MST
As printed by the Traverse City Business News, August 2009
The turbulent economy is one of the most talked about issues in the recent past and one of the most predominant issues facing us in the future. Efforts towards a turnaround and growth involve many initiatives including tax legislation such as the American Recovery and Reinvestment Act of 2009. As part of this Act, Congress has included a temporary provision for certain small businesses to use a longer carryback period for net operating losses (NOLs) incurred in 2008.
Normally, the NOL can be carried back two years and forward 20. This normal two-year period may now be extended back as much as five years. Also new with this provision is an option to select a three-, four- or five-year carryback period. The normal rules require a fixed carryback period, and have not previously provided this flexibility.
So how can this help? Depending on the historical income and losses of your particular business, the longer carryback period may bring in to play income years that would have otherwise been unavailable under the normal two-year rule. In addition, with the ability to choose the carryback period, the taxpayer may be able to maximize refunds by electing a year where taxes were paid at a higher marginal rate. Using this extended carryback period, may also leave other years available for potential refunds should your business incur another loss in 2009 or beyond.
Businesses with three-year (2006-2008) average gross receipts of $15 million or less will be eligible under this provision. This includes corporations, partnerships and sole proprietorships. In the case of a passthrough entity such as an S-corporation or partnership, the gross receipts test is determined at the entity level. However the NOL election must be made by the shareholder or partner on their individual returns.
As many of you are aware, there was a favorable increase in the 2008 and 2009 Section 179 deduction as well as the 50% bonus depreciation deduction for new assets in service in these years. Congress seemingly intends to allow taxpayers to maximize tax benefits under the new NOL rules as well. Pending legislation has been introduced in the Senate which would extend to NOLs generated in 2009 and would also include all taxpayers, rather than small businesses only.
In order to take advantage of the current 2008 NOL provision, eligible taxpayers must affirmatively elect the increased carryback period. Without this election the regular NOL rules will apply. Calendar year filers can elect for their 2008 tax year, while fiscal year filers can elect for either their tax year beginning or ending in 2008, but not both.
The election can be made on a timely filed (including extensions) original return. The election can be made on an amended 2008 return, if: a) the taxpayer did not elect to waive the carryback on the original return, and, b) the amended return is filed by the “later of” six months after the original due date (without extensions) or April 17, 2009. If the taxpayer elected to waive the carryback period on the original 2008 return, any change to that election had to be done by April 17, 2009.
There are various complexities with regard to the allowable carryback if there’s been a change in marital status, business ownership, or form of entity. Other items affected by the NOL carryback include the Alternative Minimum Tax, taxable social security benefits, AGI-based phaseouts and deductions, passive activity NOLs, basis limitations, state NOLs, among other things. Not only are these affected in the carryback year, but also for intervening years as remaining NOLs are carried forward.
Your tax advisor can assist in working through these and help determine any remaining opportunity to turn 2008 losses into current cash refunds. Your 2009 business activity should also be considered, in light of pending legislation, in order to make the best use of your deductions and maximize tax benefits.
Shelly A. Ashmore, CPA, MST, is a tax manager at Dennis, Gartland & Niergarth where she specializes in mergers, acquisitions and partnership taxation. For more information contact 231.946.1722.