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‘Double up’ on enhanced NOL carryback rules for small biz

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in Small Business Tax,Small Business Tax Deduction Strategies

The new “Worker, Homeownership and Business Assistance Act of 2009” includes a powerful tax-saver for struggling business owners. It extends and expands the earlier Stimulus Act’s tax break for net operating losses (NOLs).

Strategy: Let the tax law do double duty. If you qualify, you can take advantage of the enhanced NOL carryback rules for both 2008 and 2009. This double tax benefit is limited to certain small business operations.

A business that carries back an NOL to a profitable tax year is entitled to a quick tax refund from the IRS.

Here’s a quick recap: A business can normally carry back an NOL for two years and then forward for up to 20 years until the company exhausts the loss. However, the 2009 economic stimulus law allowed a qualified small business to carry back NOLs for up to five years (either three, four or five years). This opportunity was available for NOLs only in tax years beginning or ending in 2008.

For this purpose, a “small business” was defined as a business with an average of no more than $15 million in gross receipts over the three-year period ending with the tax year of the NOL.

Other businesses were generally limited to a two-year carryback period (see box below).

The new law sweetens the deal in two ways:

1. The election to carry back losses for up to five years is extended to businesses of all sizes, but the carryback to the fifth year is limited to 50% of the available taxable income for the year.

2. The election to carry back losses for up to five years is extended to NOLs incurred in either 2008 or 2009, but generally not both tax years.

However, if an eligible small business elected to carry back a 2008 loss under the prior rules, it can make the new-law election for an additional year. Therefore, your small business may benefit from extended carrybacks for NOLs in 2008 and 2009.

Example: Your business had annual gross receipts of $10 million the past five years. It had $3 million of taxable income for each year from 2003 through 2007, but incurred a $2 million NOL in both 2008 and 2009. Previously, you elected to carry back the $2 million NOL for 2008 to offset income from the 2003 tax year. 

Under the new law, you can carry back the 2009 NOL to the 2004 tax year, even though you’ve already elected a five-year carryback as a small business. Under the 50% rule, however, the maximum NOL carryover to 2004 is limited to $1.5 million. The remaining $500,000 of NOL from 2009 can be used to offset that amount of income from the 2005 tax year.

You must make the new-law extended carryback election for a 2009 NOL by the 2009 tax return due date (including any extension). This election is irrevocable.

Technically, the new tax break is available for tax years ending after 2007 and beginning before 2010. Thus, a fiscal-year company can make the new-law election for a tax year beginning in 2007, 2008 or 2009 (but the new-law election can only be made for one such year).

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