Working with the new loss carryback tax break

The Worker, Homeownership, and Business Assistance Act of 2009 (2009 Worker Act), enacted November 6, 2009, gives all businesses (or their owners in the case of pass-through entities) an opportunity to obtain a quick refund from the IRS using net operating losses (NOL). A company has an NOL when its business deductions for the year exceed its business income. Normally, a business can only carry back an NOL two years. But the new law allows any business to elect to carry back its NOLs from 2008 or 2009 for up to five years, regardless of form (corporation, individual, estate or trust) and size. (Partnership and S corporation NOLs flow through to partners and shareholders and can’t be carried over by the entity.)

You don’t have to make the election until the due date (including extensions) for filing your last 2009 return.  For a calendar year taxpayer, this means the election does not have to be made until September 15, 2010 (for a corporation) or until October 15, 2010 (for an individual). 

In electing the extended carryback provision, you must determine: 

  • Whether (if applicable) to revoke a previous election to waive the two-year carryback period, so that you can use the extended carryback;
  • Whether to apply the extended carryback to 2008 NOLs or 2009 NOLs, because you can only elect the extended carryback for one year;
  • Whether to carry back the NOL for three, four or five years;
  • When to apply for the refund; and
  • The IRS procedures for making the election.

You need to “crunch the numbers” and then take appropriate action.

Do the math for 2008

The 2008 calendar year is over. Calendar-year taxpayers have filed their returns. You know whether you have an NOL for 2008.  Now it’s time to dig out your old returns and your calculator. You can carry back the 2008 NOL up to five years, as far back as 2003.  This is only useful if you had taxable income in 2003, 2004, or 2005 that the NOL can offset. How much can you get back from the IRS? 

If you need the refund immediately, go ahead and claim it based on your 2008 NOLs.  But if you can afford it, wait until you have your 2009 results, and then choose which year to carry back.

If you are a small business (average gross receipts of $15 million or less for three years), an earlier law allowed you to elect an extended carryback for 2008 NOLs. The election deadline for calendar year taxpayers -- the due date for the 2008 return -- has passed. But there’s no harm. Unlike larger businesses, who must choose between 2008 and 2009, the new law gives you another extended carryback election for 2009 NOLs.

2009 NOLs – some planning still available

If 2009 is not yet over, you can do some tax planning to increase your 2009 business losses and NOL. This includes conventional techniques for accelerating deductions, recognizing losses, deferring income and avoiding gains. Claim bonus depreciation, for example.  Or perhaps you can write off a worthless stock loss or a worthless debt.

A more sophisticated technique to increase losses is to change your accounting methods.  Changing depreciation methods or valuation of inventory, for example, is a change of accounting method.  If you need the IRS’s consent, you still have until the end of 2009 to request the change.  If IRS consent is automatic, you have until the filing date of your 2009 return to make the change, the same as the deadline for electing the extended carryback.

Properly elect the carryback and claim a refund

Ordinarily, taxpayers can claim a “quick” refund by filing Form 1045 (individuals) or Form 1139 (corporations).  If you file the appropriate form within 12 months after the end of the tax year, the IRS will do a quick review and generally pay your refund within 45 days.  If you need more time to file for a refund, you can file an amended return (Form 1040-X for an individual; Form 1120-X for a corporation). 

Making an election to use the extended carryback is a separate matter from filing your claim for refund. You need to follow the IRS’s instructions for making the election. You have ample time to make the election (for a calendar year taxpayer, the deadline is late 2010), so you want to follow the proper procedures. Otherwise, your election may be rejected or your refund claim may be delayed.

The IRS has now issued procedures for making the election. The election can be made on the return filed for the year of the NOL (e.g. Form 1040 or Form 1120), on an amended return for that year, or on a claim for a tentative refund (Form 1045 or Form 1139). You must attach a statement indicating that the taxpayer is electing the extended carryback and is not a TARP (Troubled Asset Relief Program) recipient. The statement must specify the length of the carryback period you are electing (three, four, or five years).

If the taxpayer previously claimed a two-year carryback or elected to waive the carryback period, the statement must indicate that the election amends a previous carryback claim or that the taxpayer is revoking the waiver.

If you would like to discuss these matters, please contact our office. We can help you consider your options.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.