Tuesday, September 8, 2009

Tax Client Alert: Deadlines Approaching For Special NOL Carrybacks

Time is running out for many businesses wishing to take advantage of the expanded business loss carryback option included in the 2009 recovery law. Eligible calendar-year corporations have until September 15, 2009 to file the appropriate forms. Eligible individuals have until October 15, 2009 to choose this expanded carryback option.

This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly obtain some much needed cash if the business was profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it is too late.

Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for three, four or five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss on their books as far back as tax-year 2003. Not only could this mean a special tax refund, but the refund could be larger, because the loss can be spread over as many as five tax years, rather than just two.

This option may be particularly helpful to eligible small businesses with a large loss in 2008. A small business that chooses this option can benefit by:
  • Offsetting the loss against income earned in up to five prior tax years,
  • Getting a refund of taxes paid for up to five prior years,
  • Using all or part of the loss now, rather than waiting to claim it on future tax returns.
The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the 2008 tax year. Unless the appropriate election is made prior to the referenced deadlines, the taxpayers will not be eligible to take advantage of the expanded carryback period.

Many taxpayers are also revisiting whether losses that arose from 2008 taxable transactions generated ordinary losses, or capital losses. Ordinary losses may be eligible for the expanded carryback treatment. Capital losses only can be carried forward to future tax year, and then only can be utilized to offset future capital gains, or, to a very limited extent, the ordinary income of the taxpayer.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either
Jack N. Rudel at jrudel@jsslaw.com or contact Richard C. Smith at rsmith@jsslaw.com.
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