On August 13, 2009, the IRS issued a news release reminding taxpayers that time is running out on the ability to elect an extended carry-back period for a 2008 Net Operating Loss (NOL). Under provisions enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA), most corporations wishing to carry losses back more than the statutory two years must elect by September 15 of this year, and most individuals must file their election no later than October 15. The ARRA election permits taxpayers to who qualify to carry back their 2008 NOL for three, four, or five tax years.
Why Does It Matter?
An NOL is triggered when a corporation or individual has allowable losses and deductions that exceed the income and gains for the year (the Loss Year). If those deductions and losses had been reported in a year when the taxpayer had higher income and gains, the taxpayer would have gotten immediate tax benefit from the losses in the form of offsetting income or gains. The Code generally allows taxpayers who experience a Loss Year to "carry back" the loss to the two tax years immediately preceding the Loss Year. The carryback is in the form of a special amended return for the preceding year, reporting the NOL from the Loss Year as if it occurred in the preceding year, offsetting preceding year income and gains with the loss, and claiming a refund of preceding year taxes. If there is not enough income and gains in the two preceding years to use up the NOL, the unused portion is then carried forward to a maximum of 20 subsequent tax years until it is exhausted.
A fundamental principle of financial planning is that a benefit received now is more valuable than a benefit of the same amount received later, so taxpayers would always prefer to realize the tax benefit of their NOL's through the carryback process, rather than having to wait a year or more to realize it through a carryforward to a subsequent year. The ARRA election opens up as many as three additional years to the carryback, making it more likely that the full benefit of the NOL will be realized as soon as it is incurred.
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What Are The Details Of The ARRA Election?
ARRA provides that an Electing Small Business (ESB) can elect to increase the NOL carryback period for an Applicable 2008 NOL from two years to three, four, or five years. An ESB is defined as a corporation, partnership, or sole proprietorship that has averaged $15 million or less per year in gross receipts for the three years immediately preceding the Loss Year. An Applicable 2008 NOL is the taxpayer's NOL for any tax year ending in 2008, or if the taxpayer elects, any tax year beginning in 2008. So, assuming that ABC Corporation ends its tax year on June 30 of each year, it could apply the ARRA election to an NOL for the year ending June 30, 2008 (a year ending in 2008), or it could elect to apply the election to an NOL for the tax year beginning July 1, 2008 and ending June 30, 2009 (a tax year beginning in 2008).
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How and When Is The Election Made?
The IRS provided guidance on the election in Revenue Procedure 2009-26, which is included in Internal Revenue Bulletin 2009-19, page 10. In general, the Revenue Procedure provides that ESB's must file their elections under ARRA within six months following the original due date of the Loss Year tax return. A calendar year corporation's 2008 tax return was originally due on March 15, 2009, so the election must be filed no later than September 15 of 2009. Similarly, the 2008 tax returns of most individuals were due on April 15, 2009, and their ARRA elections are due October 15, 2009. The due dates of elections for fiscal year corporations will vary depending on the month that their tax year ends, and on whether or not they have elected to apply the election to a year beginning in 2008 and ending in 2009.
Taxpayers can make the election in one of two ways under the Revenue Procedure.
- Original return - The electing taxpayer can attach a statement to their timely filed original return for the Loss Year, or
- Electing on an appropriate form - The electing taxpayer can file Forms 1139 or Form 1120X for corporations, or Forms 1045 or 1040X for individuals, applying the elected carryback period.
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Is The Extended Carryback Period Available For An Alabama NOL?
The short answer is no. Alabama generally allows individuals to carry an NOL back for two years and then forward for 15 years. Corporations can only carry an NOL forward - for up to fifteen years. Unlike many provisions in Alabama tax law, the statutes governing Alabama NOL's are not linked to the Federal Code, and the Alabama Legislature has not enacted any enhanced carryback provisions, so the extended carryback period only applies for Federal NOL's.
The extended NOL carryback period provided by the ARRA election is a real opportunity for affected taxpayers to accelerate the tax benefits they are entitled to. Taxpayers who think they may be eligible should contact their tax advisors immediately about making the election.
This page last updated 8/16/09