As we reported in our September tax client alert, under the American Recovery and Reinvestment Act (ARRA) enacted in February, many small businesses that had expenses exceeding their income for 2008 could choose to carry the resulting loss back for up to five years, instead of the usual two. Under the ARRA, this option was available for an eligible small business (ESB) that had no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the net operating loss (NOL). Pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) enacted last month, this carryback option is no longer limited to ESBs. Additionally, the WHBAA extended the carryback option to include NOLs that arise in tax years beginning in 2009. Thus, businesses averaging gross receipts in excess of $15 million can now take advantage of these carryback rules and will have an option of carrying back losses for any one tax year beginning before January 1, 2010 and ending after December 31, 2007.
As under the ARRA, the election to carryback NOLs can generally only be made for one tax year. Thus, for a calendar year taxpayer, the business can elect to carryback 2008 or 2009 losses, but not both. However, an ESB that made or makes an election under the rules of the ARRA may make the election for two tax years instead of one. An ESB that has losses in both 2008 and 2009 could potentially carryback the 2008 losses under the ARRA rules and the 2009 losses under the WHBAA rules.
The WHBAA does limit the amount of the NOL that can be carried back to the 5th tax year before the loss year to 50% of the business's taxable income for that year. This limitation is not applicable to a 2008 NOL of an ESB that makes an election under the ARRA. Additionally, the WHBAA includes a separate, similar set of NOL carryback rules for life insurance companies.
Businesses that have large losses in 2008 and/or 2009 should consult with their tax advisors regarding these carryback rules as they may be able to offset income earned in up to five prior tax years and be eligible for a refund.
Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either Nancy C. Pohl or Richard C. Smith
About the Authors
Nancy C. Pohl is an Associate attorney practicing in the Estate Planning and Probate, Tax and Corporate Securities and Finance Departments. Her practice focuses on corporate and partnership tax planning, estate planning, tax-exempt organizations, general business planning and federal and state tax litigation. She also regularly advises clients on estate planning and probate matters. Contact Ms. Pohl at email@example.com or 602.262.5927.
Richard C. Smith is a Member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. Contact Mr. Smith at firstname.lastname@example.org or 602.262.5972.