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President Signs Bill Providing Temporary Five-Year NOL Carryback

President Obama recently signed into law an unemployment insurance extension bill that allows businesses with net operating losses (NOLs) for 2008 or 2009 to carry back those losses for up to five years. The bill also extends and liberalizes the first-time homebuyer tax credit. These provisions are paid for by a delay in the effective date of the worldwide interest allocation election, an increase in the corporate estimated tax payments for certain large taxpayers in the third quarter of 2014, and an increase in the penalty for failure to file a partnership or S corporation return.

The loss carryback gives cash-strapped businesses greater flexibility in writing off current losses against past profits by allowing them to carry back NOLs for up to five years (from the two years under current law) for losses incurred in taxable years beginning or ending in either 2008 or 2009, but not both. Businesses may offset 50 percent of taxable income in the fifth preceding year and 100 percent of taxable income in the remaining four carryback years. If an election is made to carry back an NOL to the fifth year preceding the loss year, the carryback is limited to 50 percent of taxable income. The remaining balance of the NOL generated in the loss year is carried forward to the fourth year preceding the loss year, and so on until the loss is utilized or expired.

The provision also suspends the 90 percent limitation on the use of any alternative tax NOL deduction attributable to carrybacks of the applicable NOL for which an extended carryback period is elected. For purposes of applying the 50 percent taxable income limitation to the carryback of an alternative tax NOL deduction to the fifth preceding taxable year, the limitation is applied separately based on alternative minimum taxable income.

Unlike the carryback enacted in the American Recovery and Reinvestment Act of 2009 (ARRA), this provision is not limited to small businesses — that is, taxpayers meeting a gross receipts test. The extended carryback provision is available to all taxpayers other than those specifically excluded. Generally, the provision does not apply to any taxpayer (or member of the affiliated group) in which the federal government acquired or acquires an equity interest (or warrants or other rights) pursuant to the Emergency Economic Stabilization Act of 2008. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are also excluded.

A taxpayer must make the election by the extended due date for filing the return for the taxpayer’s last taxable year beginning in 2009. The election, once made, is irrevocable.

The provision is generally effective for NOLs arising in taxable years ending after December 31, 2007, and beginning before January 1, 2010. The modification to the alternative tax NOL deduction applies to taxable years ending after December 31, 2002.

This article is not intended to render any legal, accounting or other professional advice on specific facts or matters. Please consult with your Smith & Howard tax professional before taking any action.