Carryback of NOL's

Five-Year Carryback of NOL's Extended For 2009 Net Operating Losses

Because of the downturn in the economy, net operating losses (“NOL”) can occur.  Tax law recognizes the inequity of having paid tax in earlier years where current losses exist and thus permits such NOL’s to be carried back in time to recover taxes previously paid.  Generally, NOL’s may be carried back two years and forward 20 years or taxpayers may elect to forego carrying the loss back and just carry it forward to offset future income.

For NOL’s arising in tax years ending after December 31, 2007, small businesses can elect to increase the NOL carryback period to 3, 4, or 5 years.  A small business for this purpose is defined as a corporation, partnership, or sole proprietorship that meets a $15 million gross receipts test for the tax year in which the loss arose.  Prior law limited the ability to use the enhanced carryback period to losses for any tax year ending in 2008, or at the election of the taxpayer, to tax years beginning in 2008, but not both.  If you did not meet the small business definition, then you were relegated to the standard 2-year carryback.

The ’09 Act retains the election to increase the carryback period for an NOL to 3, 4, or 5 years for any tax year ending after December 31, 2007, and beginning before January 1, 2010 but expands its usage to permit eligible small business that have a NOL in 2008 and 2009 to carry both losses back in time for 3, 4, or 5 years.  Companies that do not meet the $15 million gross receipts test can nevertheless also carry their 2008 or 2009 loss back in time as well but will have to select which loss year to carry back.

• The amount of the NOL that can be carried back to the 5th tax year may not be more than 50% of the taxpayer's taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year. The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for that 5th preceding tax year.
• Example – XYZ Corporation has an NOL of $5 million for its tax year ending August 31, 2009.  In its tax year ending August 31, 2004, it had taxable income of $6 million.  If XYZ elects to carry its NOL back to its 2004 tax year, then it will be able to apply only $3 million of that loss against its taxable income for 2004.  In determining the amount of the NOL that can be carried forward to years ending after Aug. 31, 2004 by XYZ, the NOL is reduced by only the $3 million that it offset for the 2004 tax year.
• The ’09 Act suspends the 90% limitation on the use of any alternative tax NOL deduction attributable to the carryback of a NOL using the extended carryback periods.  Thus, the full use of the NOL is allowed for both regular tax and AMT, limited only by the 50% offset on the 5th year carry.

For more information, please contact Scott Singer, CPA, at 630-420-1360 or ssinger@dhjj.com.