Tax Edge

By Robert Steere, Toolkit Staff Writer

A new law enacted by Congress contains expanded net operating loss carryback provisions for businesses small and large. The bill, passed by the Senate on November 4, 2009, and the House on November 5, is being signed by the President on November 6. The bill was enacted with strong, bipartisan support, and actually won a unanimous vote in the Senate.

The new law allows businesses with a net operating loss (NOL) in a tax year beginning or ending in either 2008 or 2009 to elect to carry back the NOL for up to five years instead of only two years as the current law allows. This is an extension and expansion of a special five-year rule enacted as part of the stimulus package in February 2009. That rule was applicable only to small businesses for tax years beginning or ending in 2008. It excluded larger, yet still struggling, companies. The broader NOL relief in this legislation will help many more businesses.

Practically speaking, the extended carryback period allows businesses to claim larger refunds from the IRS for prior years' tax payments, which they can then invest in their ongoing business operations.

Many businesses suffering losses in either 2008 or 2009 were profitable during the previous five years. Unfortunately for some, their NOLs for either 2008 or 2009 exceeded the profits they made in the first two previous years. Therefore, by extending the carryback period to five years, they will be able to claim larger refunds for taxes previously paid. Because most businesses have already filed their 2008 tax returns, they will be given the opportunity to file refund claims almost immediately if they carryback a 2008 NOL.

Estimates of the first year cost of this provision total $33 billion, partially offset by increased revenues of $22.5 billion over the following 9 years. Allowing NOLs to be applied against taxable income in more prior years results in an immediate and dramatic first-year cost in refunds, but reduces refunds and increases revenue in the succeeding years.

Monica McGuire, senior tax policy director at the National Association of Manufacturers (NAM), said the current two-year NOL carryback does not provide enough relief for businesses during prolonged economic distress. "This provision is urgently needed," said McGuire. "More than 20 percent of small and medium-sized NAM members reported NOLs in 2008, and we expect that number to double for 2009. Once enacted, this relief will give manufacturers the ability to transform a future tax benefit into cash today and stem the flow of mounting job losses."

Senator Max Baucus, Chairman of the Senate Finance Committee, said, "The NOL carryback provision will benefit businesses both large and small by allowing them to offset their losses so they can continue to maintain and create jobs and fight through this recession."

Under the new law, businesses are allowed to elect how long of a carryback period they want to use--anywhere from two years to five years. A business can only use the five-year carryback for the NOL of one tax year. However, an eligible small business that used the special five-year rule enacted back in February to carry back its 2008 NOL five-years is still eligible to apply the new five-year rule to its 2009 NOL.

The extended carryback election is not available for certain narrow categories of companies, such as those that have received TARP assistance.

The Business Roundtable issued a statement commending Congress for making the five-year NOL carryback period available to all companies instead of only small businesses. The Roundtable noted that, in light of the current credit crunch, access to cash is critical in order to sustain the current economic recovery. Businesses that take advantage of the new carryback provision will be able to use the tax refunds to invest in new plant and equipment, sustain research and development activities, and maintain and create jobs. The Roundtable further commented that balancing the need for economic stimulus with fiscal prudence is vital, and that the NOL relief is timely, temporary and has already proven effective. "In short," they said, "this is exactly the sort of stimulus measure we need to focus on."

Individuals can accelerate a refund by filing Form 1045, Application for Tentative Refund. Similarly, corporations with NOLs may accelerate a refund by using Form 1139, Corporation Application for Tentative Refund. Normally, refunds are issued within 45 days. These forms, along with answers to frequently-asked questions about this carryback, and other details can be found on the IRS web site.

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Posted December 11, 2009.