Accounting Services, Tax Services, Audits, CPA, IT - Armanino McKenna - IRS Provides Guidance on Claiming Extended NOL Carrybacks

BUILDING FUTURES

issues & insights

Expertise, guidance and thought leadership on issues and topics that affect organizations.

Home

Clients

Issues & Insights

IRS Provides Guidance on Claiming Extended NOL Carrybacks

When the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law in February, it included a provision allowing eligible small businesses (ESBs) to carry back a 2008 net operating loss (NOL) for up to five years. Previously, ESBs generally could carry back an NOL only up to two years. As a result of the ARRA provision, companies with significant losses in 2008 may be able to benefit fully from those losses now.

In March, the IRS issued a revenue procedure to advise ESBs on how to elect the extended carryback. Nonetheless, the IRS received many claims for extended carrybacks from taxpayers that had inadvertently failed to make a valid election. On May 11, the IRS issued Internal Revenue Bulletin 2009-19 that included Revenue Procedure 2009-26, which modifies — and clarifies — the earlier procedure for making the election.

NOL Basics
To qualify for an NOL deduction, a business must have expenses in excess of income, though certain modifications apply. Generally, once a business incurs an NOL, it has two options:

Carry back the NOL as far as possible and then carry forward any remaining amount. Carrying back a loss can generate a current tax refund. This can be especially valuable in hard economic times when an infusion of cash may be badly needed. But the most a company can get back is the tax paid in the carryback years. So the extended carryback may benefit ESBs that had little or no net income in the previous two years and, thus, couldn’t otherwise fully absorb their 2008 NOL.
Elect to waive the carryback and to carry forward the entire loss. This will offset income in future years, which can be beneficial if a business wouldn’t benefit from the carryback, doesn’t need cash currently or expects to be in a higher tax bracket in the future. The loss may be carried forward for 20 years.

Qualifying as an ESB
To qualify as an ESB, a company must satisfy the “gross receipts test.” Under the test, a business must have no greater than an average of $15 million in annual gross receipts during a three-year-period ending with the tax year of the NOL. The gross receipts test is conducted on a business-by-business basis unless certain aggregation rules apply that require all commonly controlled businesses to be taken into account as a single business.

Companies with more than $15 million in average annual gross receipts under the test can still qualify to carry back their 2008 NOL for two years.

Making the Election
Eligible calendar-year filers can elect the extended carryback only for their 2008 tax years. Eligible fiscal-year filers can make the election for a tax year either beginning or ending in 2008.

Under Revenue Procedure 2009-26, ESBs may make the election on:

The original federal income tax return. An ESB may attach a statement to its timely filed tax return for the taxable year in which the applicable 2008 NOL arises. The statement is required to say that the company is electing to apply Internal Revenue Code Section 172(b)(1)(H) and it must specify the length of the carryback period elected (three, four or five years).

If the ESB’s taxable year of the applicable 2008 NOL ended before Feb. 17, 2009, as with a fiscal year ending before that date, the company must make the election on or before the due date (including extensions) of its return for that taxable year.

An appropriate form. If the ESB didn’t make the election on its tax return for the NOL year — and didn’t elect to waive the NOL carryback period — it may make the election by filing the appropriate form, depending on the type of taxpayer:

Corporations: Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return
Individuals: Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return
Estates or trusts: Form 1045 or amended Form 1041, U.S. Income Tax Return for Estates and Trusts

An ESB making the election by filing an amended return must file the return for the earliest taxable year to which it’s carrying back the NOL, not for the applicable 2008 NOL taxable year. ESBs must file the appropriate forms on or before the date that is six months after the due date (excluding extensions) for filing the return for the NOL taxable year. (Forms 1045 and 1139 are ordinarily due within 12 months after the taxable year of the NOL.) Thus, under the ARRA provision, a company seeking to make a timely election using those forms or an amended return must file in advance of the ordinary due date. Also, if an ESB makes the election by filing an appropriate form that amends a prior refund claim, the amendment also will apply to a carryback of any alternative tax for the same taxable year.

Making the Election as a Partner, Shareholder or Sole Proprietor
Taxpayers that are a partner in a partnership ESB, a shareholder in an S corporation ESB or an owner of a sole proprietorship ESB also can make the election:

A partner in an ESB may make the election for its distributive share of the qualifying ESB income, gain, loss and deduction that is both allocable to the partner and allowed in calculating the partner’s applicable 2008 NOL.
A shareholder in an S corporation ESB may make the election for its pro rata share of the qualifying ESB income, gain, loss and deduction that is allowed in calculating the shareholder’s applicable 2008 NOL.
An owner of a sole proprietorship ESB may make the election for the qualifying ESB income, gain, loss and deduction that is allowed in calculating the owner’s applicable 2008 NOL.

To determine whether a partnership, S corporation or sole proprietorship qualifies as an ESB, the gross receipts test is applied at the partnership, corporate or sole proprietorship level. The aggregation rules apply.

These ESBs are subject to a limitation on the amount of applicable 2008 NOL they can carry back. The amount is limited to the lesser of 1) the ESB’s items of income, gain, loss or deduction that are allowed in calculating the taxpayer’s applicable 2008 NOL and are from one or more ESB partnerships, S corporations or sole proprietorships, or 2) the ESB’s applicable 2008 NOL.

For example, consider three partnerships (A, B and C) with average annual gross receipts, respectively, of $10 million, $12 million and $14 million. Tom owns a 40% interest in each partnership. None of the businesses is required to be aggregated with any other entity for purposes of the gross receipts test. Subject to the limitation above, Tom may apply his election to the portion of his applicable 2008 NOL attributable to his distributive share of the income, gain, loss and deduction of each partnership.

But if partnerships A and B are under common control and therefore subject to aggregation, their aggregated average annual gross receipts exceed $15 million. The two entities don’t qualify as ESBs, and Tom cannot apply his election to the portion of his NOL attributable to his distributive share in those partnerships. He may, however, apply it to his share of partnership C.

The Clock is Ticking
The extended NOL carryback period can provide a much-needed cash flow boost to many businesses and business owners. But the rules surrounding it are complex, and you need to act soon. If you’d like to learn whether you can benefit or would like assistance claiming the extended carryback, please contact Armanino McKenna Tax Partner Bruce Coblentz at (925) 790.2632 or by email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

Download this article in PDF format

Subscribe to Issues & Insights using RSS:

What is RSS?