Tax Edge

If your small business suffered a loss in 2008, tax refunds from prior years (which can provide an immediate infusion of cash to your business) may be within your reach.

The IRS announced that small businesses with deductions exceeding their income in 2008 can use a new net operating loss (NOL) tax provision to get a refund of taxes paid in prior years. The IRS has updated the instructions for Form 1045, Application for Tentative Refund, and Form 1139, Corporation Application for Tentative Refund, so that eligible small businesses can make use of the special carryback provision for 2008. The new provision, enacted as part of the American Recovery and Reinvestment Act of 2009, enables small businesses with a net operating loss in 2008 to elect to offset this loss against income earned in up to five prior years. Previously, such losses could be carried back only two years. Some taxpayers must make the election to use this special carryback by April 17, 2009.

To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. The IRS has clarified that the tax year of the NOL is included as one of the three tax years used in the calculation of the gross receipts test, which likely allows more taxpayers to qualify for using the new provision.

For small businesses that use a fiscal year, this special carryback may be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it may not be changed. If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009.

Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund, whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. Further, the current year's tax return must be filed by the date the Form 1045 or Form 1139 is filed. Form 1045 and Form 1139 are filed at the same place the taxpayer's return is filed, as listed on the return instructions.

In addition, Frequently Asked Questions (FAQs) have been posted on the IRS.gov website. Small business owners who file Form 1040 can also call 1-800-829-1040 with NOL questions. Corporations can contact the IRS at 1-800-829-4933 with NOL questions.

Remember, this is a one-time opportunity for a tax year either beginning or ending in 2008, and if you qualify, it can result in quick cash for your business at a time when you really need it.

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Posted April 6, 2009.