Expansion of 5-year carryback election for NOLs

On Nov. 6, 2009, President Obama signed the “Worker, Homeownership, and Business Assistance Act of 2009” (the 2009 Assistance Act) into law. The Act includes tax changes for businesses, the most significant of which are liberalized rules for certain net operating losses (NOLs). If your 2008 or 2009 tax return results in a net operating loss, you may benefit from this provision.

A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. The 2009 Assistance Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL means the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. This means the election may be made for a tax year beginning or ending in either 2008 or 2009. Taxpayers electing a 5-year carryback can use the NOL to offset up to 50% of the available taxable income for the 5th tax year preceding the loss year, and 100% of all taxable income in the remaining 4 carryback years. The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for the 5th year. In addition, the Act suspends the 90% limitation on the use of an NOL deduction for alternative minimum tax purposes, for alternative tax NOLs attributable to carrybacks for which the extended carryback is elected. We will work with our clients individually to determine whether they might benefit from this new provision.