NOL Carryback Period Extended to Five Years for Eligible Small Businesses
As part of the economic stimulus package, a new net operating loss tax provision will allow certain eligible small businesses with deductions exceeding their income in 2008 to get a refund of taxes paid in up to five prior taxable years. Typically, such net operating losses (NOLs) can be carried back for only two years.
The provision was enacted as part of the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5). On March 16, 2009, the Internal Revenue Service issued guidance on this new provision. Under the guidance, in order to use this special carryback, some taxpayers will need to make the election by April 17, 2009. The IRS said it will work to get businesses accelerated refunds under the new provision in 45 days or less, wherever possible. The Obama administration announced the guidance as one step in a broader plan to help improve the credit market for small businesses.
1) Existing Law
Under existing law, a net operating loss generally means the amount by which a taxpayer’s business deductions exceed its gross income. In general, a NOL may be carried back to the two preceding years and carried forward 20 years to offset taxable income in such years.1 NOLs offset taxable income in the order of the taxable years to which the NOL may be carried.2 In addition, the alternative minimum tax rules provide that a taxpayer’s NOL deduction cannot reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90 percent of the AMTI.
Different rules apply with respect to certain NOLs that arise in special circumstances. For example, a three-year carryback period applies with respect to NOLs that either arise from casualty or theft losses of individuals, or, with respect to taxpayers engaged in a farming business or a small business, are attributable to Presidentially Declared Disasters. Additionally, a five-year carryback period applies to NOLs that: (i) arise from a farming loss (regardless of whether the loss was incurred in a Presidentially Declared Disaster Area); (ii) comprise certain amounts related to Hurricane Katrina, the Gulf Opportunity Zone, and the Midwestern Disaster Area; or (iii) are characterized as qualified disaster losses.3 Special carryback rules also apply to real estate investment trusts (no carryback is permitted), specified liability losses (10-year carryback period), and excess interest losses (no carryback to any year preceding a corporate equity reduction transaction). Additionally, a special rule applies to certain electric utility companies.
In the case of a life insurance company, present law allows a deduction for the operations loss carryovers and carrybacks to the taxable year, in lieu of the deduction for net operation losses allowed to other corporations.4 A life insurance company is permitted to treat a loss from operations (as defined under section 810(c)) for any taxable year as an operations loss carryback to each of the three taxable years preceding the loss year and an operations loss carryover to each of the 15 taxable years following the loss year.5 Special rules apply to new life insurance companies.
2) Extended Carryback Under New Law
The new law provides “eligible small businesses” with an election6 to increase the present-law carryback period for an “applicable 2008 NOL” from two years to any whole number of years elected by the taxpayer, up to a maximum of five years. An eligible small business is a taxpayer meeting a $15 million gross receipts test,7 which is generally satisfied with respect to the prior taxable year if the average annual gross receipts of the entity for the three taxable years ending with the prior taxable year does not exceed $15 million. An applicable NOL is the taxpayer’s NOL for any taxable year ending in 2008, or if elected by the taxpayer, the NOL for any taxable year beginning in 2008. Any election under this provision may be made only with respect to one taxable year.
a. Provisions Applicable to Life Insurance Companies
For life insurance companies, the provision provides an election to increase the present law carryback period for an applicable loss from operations from three years to four or five years. An applicable loss from operations is the taxpayer’s loss from operations for any taxable year ending in 2008, or, if elected by the taxpayer, the loss from operations for any taxable year beginning in 2008.
The provision does not apply to: (1) any taxpayer if (a) the federal government acquires, at any time, an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008,8 or (b) the federal government acquires, at any time, any warrant (or other right) to acquire any equity interest with respect to the taxpayer, pursuant to such Act; (2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; or (3) any taxpayer that in 2008 or 20099 is a member of the same affiliated group (as defined in section 1504 without regard to subsection (b) thereof) as a taxpayer to which the provision does not otherwise apply.
e. Effective Date
The new provision is effective for NOLs that arise in taxable years ending after December 31, 2007.
d. Transition Rules
With respect to a NOL for a taxable year ending before the enactment of the new provision, the provision includes the following transition rules: (1) any election to waive the carryback period under either section 172(b)(3) with respect to such loss may be revoked before the applicable date; (2) any election to increase the carryback period under this provision is treated as timely made if made before the applicable date; and (3) any application for a tentative carryback adjustment under section 6411(a) with respect to such loss is treated as timely filed if filed before the applicable date. For purposes of the transition rules, the applicable date is the date that is 60 days after the date of the enactment of the provision.
1 I.R.C. § 172(b)(1)(A).
2 I.R.C. § 172(b)(2).
3 I.R.C. § 172(b)(1)(J).
4 I.R.C. §§ 810, 805(a)(5).
5 I.R.C. § 810(b)(1).
6 For all elections under this new provision, the common parent of a group of corporations filing a consolidated return makes the election, which is binding on all members of the group.
7 For this purpose, the gross receipt test of section 448(c) is applied by substituting $15 million for $5 million each place it appears.
8 For example, if the federal government acquires an equity interest in the taxpayer during 2010, or in later years, the taxpayer is not entitled to the extended carryback rules under this provision. If the carryback has previously been claimed, amended filings may be necessary to reflect this disallowance.
9 For example, a taxpayer with a NOL in 2008 that in 2010 joins an affiliated group with a member in which the federal government has an equity interest pursuant to the Emergency Economic Stabilization Act of 2008 may not utilize the extended carryback rules under this provision with regard to the 2008 NOL. The taxpayer is required to amend prior filings to reflect the permitted carryback period.