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Wednesday, October 6, 2010

IRS Guidance Clarifies How to Claim NOL Carrybacks under the Latest Extension


One of the provisions of the Worker, Homeownership and Business Assistance Act of 2009 (WHBAA), signed into law in November, 2009, allows businesses of all sizes to elect to carry back a net operating loss (NOL) for 2008 or 2009 (and, in some cases, for both years) up to five years.

The IRS has now issued Revenue Procedure 2009-52, which provides guidance on applying the new rules and procedures for claiming the election. Businesses with NOLs now have several options, so it's important to conduct an analysis to determine which alternative will produce the greatest tax benefit.

Background

Ordinarily, businesses are permitted to carry back an NOL two years (three years for certain casualty losses) to offset the loss against taxable income in those years and receive a retroactive refund. Generally, a loss is deducted from income in the earliest year first, with any unused portions carried forward. Businesses can also elect to waive the carryback period and instead carry the loss forward for up to 20 years. An alternative minimum tax (AMT) NOL may be used to offset only up to 90% of AMT income in the carryback or carry-forward year.

Last February, the American Recovery and Reinvestment Act of 2009 (ARRA) permitted ESBs to carry back NOLs to the third, fourth or fifth tax year preceding the loss year. Generally, ESBs are businesses with average annual gross receipts of $15 million or less for the three years ending with the loss year. For calendar-year taxpayers, the extended carryback election was available only for NOLs arising in 2008. Fiscal-year taxpayers could make the election for their tax year ending in 2008 or beginning in 2008 (but not both).

WHBAA expanded NOL relief to businesses of all sizes and extended it to include 2009 tax years. This means calendar-year taxpayers can elect an extended carryback period for losses in either 2008 or 2009. Fiscal-year taxpayers have three loss years to choose from: the tax year ending in 2008, the tax year beginning in 2008 and ending in 2009, or the tax year beginning in 2009. ESBs that made or make an election under ARRA, however, can also make an election under WHBAA for another tax year.

Taxpayers must also decide which tax year - the third, fourth or fifth preceding year - should receive the NOL carryback. WHBAA limits carrybacks to the fifth preceding tax year to 50% of that year's taxable income. As with other NOL carrybacks, the unused portion can be carried over into the following years. (The 50% limitation doesn't apply to ESBs that elected the extended carryback period under ARRA before WHBAA's Nov. 6 effective date.)

For taxpayers who elect an extended carryback period, WHBAA also suspends the 90% limitation for AMT purposes. The extended NOL carryback period isn't available to recipients of benefits under the Troubled Asset Relief Program (TARP) or to members of a consolidated group that includes a TARP recipient.

The IRS Guidance

Rev. Proc. 2009-52 provides that eligible businesses must make an irrevocable election to extend the NOL carryback period by the due date including extensions of their last tax year beginning in 2009. The Revenue Procedure spells out two alternative methods for making the election:

Method 1. The taxpayer attaches a statement to its return (or amended return) for the NOL year, stating:

  • Its intent to apply Internal Revenue Code (IRC) Sec. 172(b)(1)(H) under Rev. Proc. 2009-52,
  • That it isn't a TARP recipient or, in 2008 or 2009, an affiliate of a TARP recipient, and
  • The length of the carryback period (three, four or five years) being elected.

The statement must also be attached to the taxpayer's claim for tentative carryback adjustment (for example, Form 1139 for corporations or Form 1045 for individuals), which also must be filed by the due date described above.

Method 2. The taxpayer attaches the statement described above to the "appropriate form" for applying the NOL carryback. Appropriate forms include:

  • For corporations: Form 1139 ("Corporation Application for Tentative Refund") or Form 1120-X ("Amended U.S. Corporation Income Tax Return")
  • For individuals: Form 1045 ("Application for Tentative Refund") or Form 1040-X ("Amended U.S. Individual Income Tax Return")
  • For estates and trusts: Form 1045 or amended Form 1041 ("U.S. Income Tax Return for Estates and Trusts")
  • For tax-exempt organizations with unrelated business income: Form 1139 or amended Form 990-T ("Exempt Organization Business Income Tax Return")

The filing deadline when using an appropriate form is the due date, including extensions, of the taxpayer's last tax year beginning in 2009.

Taxpayers may elect the extended NOL carryback period even if they've already filed an application for tentative carryback adjustment or an amended return (except for ESBs that made an election under ARRA). The election must indicate that it amends a previous carryback application or claim.

Taxpayers that previously elected to waive the NOL carryback period may revoke the waiver and claim the extended carryback period as described above. The election must state that the taxpayer is revoking an earlier NOL carryback waiver.

Rev. Proc. 2009-52 also clarifies that the 50% limitation on five-year carrybacks applies for both AMT and regular tax purposes.

Analyze Your Situation

As the 2009 tax filing season approaches, now is the time to review your options and determine the right NOL strategy for your business. The ability to carry back losses to offset taxable income in previous years can produce substantial retroactive refunds and do wonders for your cash flow.

We can perform an analysis of your current tax position to identify the optimal use of 2008 and 2009 NOLs. We can also help you comply with IRS procedures for claiming the tax benefits to which you're entitled.

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