Extended NOL Carryback Filing Deadline

In February of 2009, a massive federal spending bill became law. Titled “The American Recovery and Reinvestment Act of 2009,” the Act contains 575 pages of tax provisions. One of those provisions (contained in Sec. 1211 of the Act which amends I.R.C. §172(b)(1) and 448(c)) involves the handling of net operating losses. Specifically, the provision allows “small businesses” that have losses in tax years ending in 2008 (or, at the taxpayer’s election, tax years beginning in 2008) to apply the loss to previous years’ income for up to five years (rather than two) before the year in which the loss takes place (the twenty-year carryforward rule still applies).

Note: The idea behind the provision is to allow businesses who have current losses the ability to carry back those losses for up to five years (rather than two) and apply the loss against income in those earlier years and filed an amended return to get a tax refund – cash in hand now that can be spent stimulating the economy.

A “small business” (including sole proprietorships and individual members of pass-through entities) is defined as a business with average gross receipts (or, for members of pass-through entities, the member’s share of income) for the prior three years not in excess of $15 million. While the five-year carryback is allowed for computing AMT, the 90 percent limit contained in I.R.C. §56(d)(1)(A)(i)(11) (which prevents taxpayers from completely eliminating prior year tax liability with an NOL carryover remains in place for the five-year carrybacks. Also, a business that had already made an NOL election can revoke the election within 60 days of the date the election was made to utilize the provision.

Note: While the provision applies to partnerships, a partnership cannot have a net operating loss (a partnership is not a taxpayer). That raises a question as to whether the loss for the entity, when passed through to an owner, will result in an NOL for the owner that can be carried back five years. The provision doesn’t address the matter and also doesn’t specify how to handle the situation when a pass-through entity’s grossreceipts exceeds $15 million, but an individual owner’s share does not exceed the limit. Will the $15 million limit be applied at the entity level or the owner level? The provision doesn’t address this question either and it is not mentioned in the committee reports.

Comment: Limiting the provision to businesses with gross receipts under $15 million will prevent many middle-to large businesses from utilizing the provision. Consequently, the stimulative effect of the provision is thereby diminished.

Election

The election deadline for the extended carryback (for calendar year taxpayers) is September 15, 2009, for corporations and October 15, 2009, for non-corporate taxpayers.