This Alert summarizes a provision regarding taxation of net operating losses in the recently enacted Worker, Homeownership, and Business Assistance Act of 2009 (the “WHBA”), which was signed into law by President Obama on November 6, 2009. This legislation generally extends the period in which unemployment benefits may be claimed, and also contains numerous tax benefits for businesses.
An expanded net operating loss (“NOL”) carryback was extended to small businesses (those with $15 million or less in average gross receipts) by the American Recovery and Reinvestment Act of 2009, commonly known as the “Stimulus Act.” The WHBA extends the benefits of the expanded NOL carryback to all businesses that suffered certain tax losses in 2008 or 2009, regardless of their gross receipts.
Background
Generally, an NOL is the amount by which the tax deductions of a business exceed its gross income, with certain modifications. A business that sustains an NOL for a tax year is permitted to take an NOL deduction to reduce income in another tax year. Generally, a business can “carry back” an unused NOL to each of the two tax years preceding the year in which the NOL was sustained or “carry forward” the NOL to each of the 20 tax years following the year in which the loss was sustained. When a business “carries back” an NOL to an earlier year, it may file an amended return for that year and claim a refund due to the loss.
New Law Explained
Carryback period lengthened for certain 2008 or 2009 losses. The WHBA benefits businesses experiencing financial difficulty by expanding their ability to use NOLs attributable to 2008 or 2009. Taxpayers can elect to carry back a 2008 or a 2009 NOL for three, four or five years, instead of the normal two years. The advantage of this extended carryback period is somewhat reduced by a limitation on the amount of loss that can be carried back to the fifth tax year preceding the loss year. Also, businesses with $15 million or more in gross receipts can make the election for only one year – 2008 or 2009. Businesses with less than $15 million in gross receipts can elect to use an extended carryback period for both 2008 and 2009 NOLs.
Election to Utilize Extended Carryback. A business must affirmatively elect to use the lengthened carryback period. If a business uses a calendar year, the election must be made by the due date (including extensions) of the business’s 2009 tax return. Businesses which use a fiscal year can make the election for tax years beginning or ending in 2008 or 2009. It is important to note that once made, the election is irrevocable.
Conclusion
The new NOL carryback rules could have significant benefit for businesses that have been affected by these trying economic times, especially those which had significant tax liability in 2006 and earlier years but which have recently suffered losses. There is a considerable degree of complexity involved both in taking full advantage of the tax benefits and in avoiding pitfalls, so you should consult your tax advisor prior to acting in reliance on the availability of these benefits.
Manning Fulton’s experienced attorneys are available to advise you on the new tax laws or any other tax or business law issues that you may have. If you have any questions, please contact Gene Chianelli (chianelli@manningfulton.com) or Deborah Hildebran- Bachofen at (hildebran@manningfulton.com).
About the Author
Eugene W. Chianelli, Jr.
chianelli@manningfulton.com
An associate of Manning Fulton & Skinner P.A. in Raleigh NC, Gene Chianelli focuses his practice on tax and business planning. He counsels clients on entity selection, business planning, corporate and partnership tax planning and compliance, tax credits and other incentives, and state and local taxation issues. He also counsels clients on estate-planning and wealth-transfer issues. Before joining Manning Fulton, Gene worked for KPMG in Raleigh, focusing his practice on state and local tax issues and business incentives. Gene earned a law degree from Saint Louis University and a masters of law in taxation from Washington University.
About Manning Fulton & Skinner, P.A.
Founded in 1954, Manning Fulton and Skinner, P.A. is a midsize law firm representing clients of all sizes in various transactional, litigation, and real estate matters. The firm partners with clients to structure their businesses, defend their interests, and protect their wealth. Manning Fulton prides itself on the strong relationships it has built with its clients over the past half century – many of whom are still Manning Fulton clients today – and remains committed to the ideals of client service, service to the profession and service to the communities in which we live and serve.
Print or download pdf
