TAX
Carried Away
A 2009 act expands—and raises questions about—the ability to carry back net operating losses.
By Harvey Coustan, CPA
The Homeownership and Business Assistance Act of 2009 greatly expands the number of taxpayers eligible to increase the carryback years for a net operating loss (NOL). Earlier in 2009, the American Recovery and Reinvestment Tax Act (ARRA) liberalized the carryback period to three, four, or five years, but only for eligible small businesses (ESBs) (those with annual gross receipts of $15 million or less). The Homeownership and Business Assistance Act, on the other hand, extends this elective beyond ESBs, to taxpayers whose annual gross receipts exceed $15 million.
The language of the Act, however, has left some unanswered questions. Revenue Procedure 2009-52, issued in November 2009, has answered a number of them, including when and how to elect in three situations: Taxpayers that have not claimed a deduction for an applicable NOL, taxpayers that previously claimed a deduction for an applicable NOL, and taxpayers that previously filed an election to forgo the carryback period.
Taxpayers generally are allowed to carry back NOLs to each of the two years preceding the year in which the loss is sustained (the “loss year”). Certain life insurance companies are allowed a three-year carryback period, and under the Act these companies are also allowed an extended carryback period for losses from operations.
In addition, after applying the NOL in those two or three years, taxpayers other than life insurance companies can carry any excess NOL to each of the 20 years following the loss year. Life insurance companies can carry the losses forward to each of the 15 years after the loss year.
Taxpayers (including life insurance companies) can opt to forgo the carryback period and carry NOLs forward only. Those that elected to forgo a carryback period for a loss year ending before November 6, 2009 can revoke that election before the due date (including extensions) for filing a return for the last taxable year beginning in 2009. An application for a tentative carryback (“quickie”) refund on Form 1139 for corporations and Form 1045 for other taxpayers is considered timely if filed before the due date.
Under the earlier ARRA provision, an ESB can apply an NOL in either the fifth, fourth or third year that precedes the loss year. Eligible losses are those the ESB incurred in years beginning or ending in 2008. The Act extends this benefit for NOLs sustained in a taxable year ending after calendar year 2007, and beginning before calendar year 2010.
Both the ARRA election and the election under the Act generally can be made for only one taxable year. However, an ESB that has made or makes an ARRA election can also make an election for another year, as long as the NOL was sustained in a year that falls within the stated period. To carry an NOL to the fifth preceding year, the NOL applied to that year cannot exceed 50 percent of the taxable income in that year (calculated before the NOL is applied). The excess NOL then can be carried to taxable years after the fifth preceding year in chronological order.
If the NOL is a minimum tax NOL, the 50-percent limitation is separately calculated on the AMT taxable income in the fifth preceding year. An ESB’s ARRA election is not subject to a 50-percent taxable income limitation, and TARP recipients are not allowed to elect the provision contained in the Act.
Under the Act, the election can be made on a statement attached to the taxpayer’s federal income tax return for the loss year. If a return has already been filed, the statement can be attached to an amended return.
To qualify, the election statement must confirm that the taxpayer is electing under Internal Revenue Code Section 172(b)(1)(H) or Section 810(b)(4) (life insurance companies) under Revenue Procedure 2009-52. Also, it must indicate that the taxpayer is not a TARP recipient or, in 2008 or 2009, an affiliate of a TARP recipient. And it must specify the length of the NOL carryback period elected (3, 4, or 5 years).
This election statement must be filed with the original or amended return for the loss year on or before the due date (including extensions). For example, a taxpayer that has filed a return for loss year calendar 2008, but has not filed a claim for a refund, can file the election statement with an amended 2008 calendar year return, as long as it is filed before the 2009 calendar year return due date (including extensions). A copy of the election statement must be filed with the claim for refund for the year to which the loss is applied. The due date for filing a quickie refund claim is extended to the due date (including extensions) for the taxpayer’s last taxable year beginning in 2009 or September 15, 2010 (if fully extended) in the example.
In lieu of this, Revenue Procedure 2009-52 permits the election to be made in a claim for refund or quickie refund application. If this is the case, the statement must include the same information as that used to make the election in the loss-year return. Also, it must adhere to the same due dates.
What’s more, taxpayers can revoke a prior claim for refund or application for a quickie refund, unless the claim or application was made under the ARRP ESB program. The procedures are the same as those followed by taxpayers that have not claimed deductions for applicable NOLs, with the exception that the election statement must confirm that the election amends a previous refund claim or carryback application. Due dates are apparently also the same. AMT NOL refund claims are also eligible and, again, the same rules apply.
If an election has been made to forgo a carryback for an applicable NOL with a taxable year ending before November 6, 2009, the election can be revoked, and an election for an extended carryback made. The same procedures are followed, and the election statement must confirm that the taxpayer is revoking an NOL carryback waiver and electing to apply §172(b)(1)(H) or §810(b)(4) (life insurance companies). Once again, the statement must be filed before the due date (including extensions) for the taxpayer’s last taxable year beginning in 2009.
The process for filing for an extended NOL carryback period is straightforward, since Revenue Procedure 2009-52 is more taxpayer friendly than the guidance published for ESB refund claims under ARRA: Revenue Procedures 2009-19 or 2009-26. And although the election itself is irrevocable, the due date for making the election allows plenty of time to make an informed decision.
Harvey Coustan is an Ernst & Young retired partner. He is presently consulting on substantive technical and professional standards issues and has been an expert witness in a number of cases.