Carryback of 2008 Net Operating Losses
The American Recovery and Reinvestment Tax Act of 2009 (also know as the Stimulus Act) contained important provisions that are applicable to 2008 business income tax returns currently being prepared. The amendments affects the carryback of 2008 net operating losses. This is particularly important to corporate returns that have an original due date of March 15, 2009.
A net operating loss (NOL) generally means the amount by which a taxpayer’s business deductions exceed its gross income. Prior to amendment, an NOL could generally be carried back only 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 (oldest first). Taxpayers may elect to forego carrying an NOL back, and only carry it forward. Different rules apply with respect to NOLs arising in certain circumstances. Alternative minimum tax rules provided that a taxpayer’s NOL deduction could not reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90 percent of AMTI.
The Act provides an election for a business with gross receipts of $15 million or less to use a longer carryback period of three, four, or five years. This may allow a quicker and larger tax refund resulting from a 2008 NOL than was previously available. The Act also suspends the 90-percent AMTI limitation on the use of of 2008 losses.
That all sounds good, but it now gets a little tricky. For a calendar year business, these elective carryback provisions apply only to an NOL arising in tax year 2008. Fiscal year taxpayers, however, have a choice; they may apply these provisions to their 2007-2008 or their 2008-2009 tax years, but not both. Once made, an election to use these extended carryback provisions is irrevocable. The Service will tell us later how to make one of these elections.
Corporate net operating losses are fairly straightforward. The computation of NOLs for individuals is more complicated because they involve only business income or losses (including wages, income and losses from sole proprietorships, and pass-through income or loss from partnerships, limited liability companies, and S corporations). Individual tax attributes such as itemized or standard deductions, personal exemptions, and non-business items are factored out. Application of the new provisions to partnerships is not entirely clear, since current law governing net operating losses does not apply to these entities; partnership losses pass through and the NOLs are determined at the partner level. The Service will clarify later how the new provisions apply to partnerships and partners.
Taxpayers that have already filed returns carrying back 2008 NOLs for only two years, or who have already elected to forego the two-year carryback period entirely, may revoke those elections and elect to use the extended carryback periods, provided the revocation and new election is made before April 18, 2009 (60-days after the president signed the new law).
Bottom line is that if you have business net operating losses in 2008, you may want to consider extending the due date of the return until you can review your options under these one-time election provisions. Corporations with fiscal years either ending or beginning in 2008 have more options. Taxpayers who have already filed 2008 tax returns with NOLs need to quickly consider if they want to change their NOL treatment. If you are faced with any of these choices, discuss them carefully with your tax professional, or call or email me.
Ronnie
Copyright 2009 Ronnie C. McClure, PhD, CPA