5-Year Carryback of 2008 and 2009 Net Operating Losses (NOLs) for Eligible Small Businesses (ESBs)

Congress recently passed two laws that can affect businesses with Net Operating Losses (NOLs).

American Recovery and Reinvestment Tax Act of 2009 (“ARRA”) Section 1211:

ARRA allows an eligible small business (“ESB”) to elect to carry back an “applicable 2008 net operating loss” for a period of 3, 4, or 5 years to offset taxable income in those preceding taxable years. The “applicable 2008 net operating loss” means the taxpayer’s net operating loss for any taxable year ending or beginning in 2008. The election is irrevocable and can be made for only one tax year.

The term “ESB” has the same meaning given that term by §172(b)(1)(F)(iii), except §448(c) is applied by substituting “$15 million” for “$5 million” in each place it appears.

Section 172(b)(1)(F)(iii) provides that a small business is a corporation or partnership that meets the gross receipts test of §448(c) for the taxable year in which the loss arose. Sole proprietorships are evaluated on whether they would meet this test if the sole proprietorship were a corporation.

Additionally, as discussed in Revenue Ruling 2009-09, because §172(d)(4)(C) treats any deduction for casualty or theft losses allowable under §165(c)(2) or (3) as a business deduction, a casualty or theft loss an individual sustains after December 31, 2007, is considered a loss from a “sole proprietorship” within the meaning of §172(b)(1)(F)(iii). Accordingly, an individual may elect either a 3, 4, or 5-year net operating loss carryback for an applicable 2008 net operating loss, provided the gross receipts test provided in §172(b)(1)(H)(iv) is satisfied.

For further information:

Check the ARRA web page

and

Refer to Revenue Procedure 2009-26 on page 935 in the Internal Revenue Bulletin 2009-19, Revenue Procedure 2009-19 on page 747 in the Internal Revenue Bulletin 2009-14, and Revenue Ruling 2009-09 on page 735 in the Internal Revenue Bulletin 2009-14.

Worker, Homeownership, and Business Assistance Act of 2009 (“WHBAA”) Section 13:

This law amends §172(b)(1)(H) to allow most taxpayers, not just ESBs, to elect to carry back an applicable NOL or loss from operations for a period of 3, 4, or 5 years to offset taxable income in those preceding taxable years.  This change applies to taxable years ending after December 31, 2007, and beginning before January 1, 2010.  The election is irrevocable and generally can be made for only one tax year.  An NOL carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. 

For further information, check the FAQ web pages

and

http://www.irs.gov/newsroom/article/0,,id=215657,00.html

and

Refer to Revenue Procedure 2009-52 on page 744 in Internal Revenue Bulletin 2009-49.