Tax Tips
Tax Changes for Businesses in the Worker, Homeownership, and Business Assistance Act of 2009 - January 2010
Richard Scrivanich - Partner
The Worker, Homeownership, and Business Assistance Act of 2009 (the Act), which was signed into law on November 6, 2009, makes it easier for most businesses to get immediate tax savings from net operating losses (NOLs). It does so by allowing certain NOLs to be carried back to earlier, more profitable years. In these tough economic times, that's good news for businesses who have suffered losses recently after better years when high taxes were paid. On the negative side, the Act defers a scheduled drop in the FUTA (Federal Unemployment Tax Act (FUTA) tax rate, increases penalties for certain businesses that fail to meet return filing requirements, and boosts estimated taxes for large corporations in 2014. In this article we will take a brief look at the changes related to NOLs only.
Background on NOLs. 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 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 business may forego the entire carryback period and instead carry the NOL forward.
For NOLs arising in a tax year beginning or ending in 2008, eligible small businesses (ESBs) could elect to increase the NOL carryback period from 2 years to 3, 4, or 5 years. A calendar year business could only make the election for 2008. A fiscal-year taxpayer whose year ended in 2008 could make the election either for (a) its fiscal year ending in 2008 or (b) its fiscal year beginning in 2008 and ending in 2009, but not both. An ESB is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose.
New law allows longer carryback period for most businesses. The Act generally permits any business (not just an ESB) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years (however, businesses getting certain federal bailout funds are not eligible). An applicable NOL is a business's NOL for any tax year ending after Dec. 31, 2007, and beginning before January 1, 2010. Generally, an election may be made for only one tax year. However, an ESB that made or makes an election under the rules in effect before November 6, 2009 (the Act's enactment date) may make an election for 2 tax years instead of just 1.
There are some NOL transition rules as well as other intricacies to watch out for. Therefore, you should consult with a tax advisor before attempting to claim any benefits related to NOLs.
If you have any questions regarding the above discussed topic or any other tax matter, please feel free to give me a call at (562) 698-9891.
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