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Interaction of New NOL Carryback Provision with Eligible Small Business NOL Election for 2008
President Obama today signed H.R. 3548, The Worker, Homeownership, and Business Assistance Act of 2009.
The new law includes an expansion of the net operating loss (NOL) provision that applied for small businesses, as enacted earlier this year in the
American Recovery and Reinvestment Act (ARRA). Under the legislation, all businesses (with certain exceptions) may elect to carry back NOLs for up to five years for losses incurred either in 2008 or 2009, but not for both years (at the election of the taxpayer). Businesses are able to offset 50% of the available income from the fifth year and 100% of income in the remaining four carryback years. Small businesses that have already elected to carry back 2008 losses under ARRA could also elect to carry back losses from 2009.
A taxpayer that makes this election will have the same three-, four-, or five-year carryback period for alternative minimum tax (AMT) NOLs as for regular tax NOLs. The new legislation removes the limitation for these AMT NOL carrybacks that only 90% of the AMT income can be offset by the AMT carryback. However, an AMT NOL carryback to the fifth preceding tax year would be limited to 50% of the AMT income in that year.
Prior Carryback Election by Small Business Taxpayers
Prior law allowed a taxpayer to elect to carry back an NOL from an eligible small business for three, four, or five tax years. This election was available to taxpayers that had NOLs from a business activity—either incurred directly or flowing through from partnerships and S corporations—if the business activities (or partnerships or S corporations) had average annual gross receipts of $15 million or less. The election was allowed for one tax year either ending in 2008 or beginning in 2008.
In some cases, a taxpayer could have NOLs eligible for the eligible small business election and other losses that were not. The other losses could still be carried back two years. (There was no special 50% of taxable income limitation on carrybacks of eligible small business NOLs to the fifth preceding tax year.)
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New Legislation
The new law leaves the eligible small business NOL election in place, and it continues to be available for one tax year ending in 2008 or beginning in 2008. A taxpayer making the eligible small business election may also make an election under the new five-year NOL carryback rule for one other tax year ending after 2007 and beginning before 2009. A calendar year taxpayer that made an eligible small business NOL election for 2008, therefore, would be permitted to make an election for 2009 under the new five-year NOL carryback rule. The eligible small business election, however, must be made by the due date of the tax return (with extensions) for the year of the loss, and for many taxpayers, this deadline will have already passed.
The new law does not provide any authorization for a taxpayer that already made an eligible small business NOL election (for a tax year ending in 2008 or beginning in 2008) to revoke that election and replace it with an election under the new five-year NOL carryback rule.
Taxpayers that are still eligible to make an eligible small business NOL election and that have not already done so would need to consider whether to make an election instead under the new five-year NOL carryback rule. This would apply generally to taxpayers whose return for a tax year beginning in 2008 has not passed the due date, counting any extensions. The tax return of a corporation with a fiscal tax year ended February 28, 2009, would be due (on extension) on Monday, November 16, 2009.
If the full amount of the taxpayer’s NOL would qualify for a three-, four-, or five-year carryback under the eligible small business NOL rule, the eligible small business election might be preferable, as there would be no 50% taxable income limitation in the fifth preceding tax year, and the taxpayer would still be allowed to elect a three-, four-, or five-year carryback under the new NOL carryback election for a later tax year in the 2008-2009 period. If the taxpayer had some NOLs that could be carried back under the eligible small business rule for three, four, or five years and others that could only be carried back two years, making the election under the new NOL carryback election might produce a larger refund, but a second election for a later tax year would not be allowed.
Effect of Three-, Four-, or Five-Year NOL Carryback on Tax Credits
Taxpayers need to consider the effect of carrying back a loss from 2008 or 2009 for three, four, or five tax years on their use of general business tax credits (GBCs) and their origination and use of alternative minimum tax credits (MTCs).
By carrying back an NOL, for example, from 2008 to 2003, there would be less regular tax and (potentially) less tentative minimum tax or AMT in 2003. Generally, a smaller amount of any GBCs originating in 2003 or carried over from earlier tax years could be used in 2003, and would increase the GBC carryforwards into later years. The reduced tax and tentative minimum tax for 2003 could also reduce the use of any MTCs carried forward into 2003 and increase their carryforward into later years. Furthermore, the amount of any AMT in 2003 could change, also affecting the amount of MTCs carried forward into later years.
One specific effect of a change in GBCs and MTCs carried forward, on account of a three-, four-, or five-year NOL carryback, could be on a taxpayer’s eligibility to make an election to forego bonus depreciation on certain property placed in service in 2008 or 2009 and, as a trade off, to claim additional GBCs and MTCs in 2008 and 2009. The amount of GBCs and MTCs that would be allowed (and which are refundable)—in addition to whatever would be allowed under the general limitations—depends on the amount of GBC carryovers that are available for the first tax year ending after March 31, 2008, that are attributable to research credits that originated in tax years beginning before 2006, and the amount of MTCs available for the first post-March 31, 2008 tax year that relate to AMT for tax years beginning before 2006.
A taxpayer with an NOL in 2008 or 2009—by carrying that NOL back to 2003, 2004, or 2005—could increase the amount of pre-2006 research credits and MTCs available in 2008, and by making this election, could obtain a refund of credits in 2008 and 2009, as well as a refund of tax from 2003, 2004, and 2005 from the NOLs. Elections to forego bonus depreciation and take additional credits would need to be made (for 2008 bonus depreciation) by the due date of the tax return (with extensions) for the first tax year ended after March 31, 2008, or, potentially (for 2009 bonus depreciation), for the first tax year ended after December 31, 2008.
Taxpayers that already made an election to forego bonus depreciation and to claim additional credits, and that, with enactment of the legislation, would make an election to carryback NOLs three, four, or five years, will need to determine whether the NOL election has any effect on the amount of additional credits that have already been claimed, and whether an amended return needs to be filed for a 2008 or 2009 tax year.
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