- Recent Legislation Expands NOL Carryback Provision, Allowing Loss Companies of All Sizes to Obtain Cash Refunds in Time of Need
- November 20, 2009 | Author: Saba Ashraf
- Law Firm: Troutman Sanders LLP - Atlanta Office
On Friday, November 6, 2009, President Obama signed a bill expanding and extending the net operating loss (“NOL”) carryback rules. The Worker, Homeownership, and Business Act (“the Act”) expands the NOL carryback provision for small businesses that was in the American Recovery and Reinvestment Act (“Recovery Act”), enacted in February 2009. The Act allows all businesses (except those that received funds under the Troubled Asset Relief Program (“TARP”)) with a loss in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. Under the earlier Recovery Act, only small businesses were permitted to claim the five-year NOL carryback. The NOL carryback will make it possible for businesses to receive a cash refund of taxes paid in recent profitable years if they had losses in either 2008 or 2009.
NOL Carryback Provision of Act
An NOL generally means the amount by which a taxpayer’s business deductions exceed its gross income. NOLs are valuable tax attributes, as they reduce the amount of taxes otherwise payable. Many taxpayers have no current taxable income against which they can use the NOLs, and furthermore do not expect to have taxable income in near future years against which they can use the NOLs. A lot of these taxpayers have, however, had taxable income in the previous few years, so that if they were permitted to carryback NOLs to those years, they would get a cash refund, which refund they could use for various business needs. There are no strings attached to how the cash refund may be used. (Under current law, without taking into account the provisions of the Act or the Recovery Act, NOLs may be carried back 2 years, and forward 20 years to offset taxable income in such years.)
The Recovery Act, enacted earlier this year, allowed eligible small businesses (those generally with average annual gross receipts of $15 million or less) to elect to increase the carryback period for NOLs for the taxable year ending in 2008 (or at the taxpayer’s election for any taxable year beginning in 2008) from 2 years to any whole number of years from 2 to 5. Many business groups were reportedly unpleasantly surprised by the limited amount of relief in the Recovery Act, saying that an expanded provision would have been one of the most proven ways of helping struggling companies, creating jobs, and stimulating the economy.
The Act places no limits on the availability of the carryback relating to the size of the taxpayer. Further, the legislation places no limit on the amount of carrybacks for the first 4 years of the carryback period, and for year 5, the carryback is limited to 50% of a company’s taxable income in that year. Finally, while the carryback allowed by the Recovery Act was limited only to losses generated in 2008, the Act allows the carryback of losses generated in 2008 and 2009.
An IRS representative has stated that it is quickly working on releasing guidance under the Act, including the mechanics of making the election relating to NOL carrybacks.
Cash Refunds For Businesses In Time of Need
The NOL carryback will be particularly helpful for businesses in industries that were profitable in many of the past few years, but not 2008 or 2009, which includes many companies in the manufacturing, financial, construction and other real estate industries. Upon signing the bill, President Obama remarked that “[t]housands of entrepreneurs will get the cash they need to avoid laying off workers or closing their doors.” The spokespersons of several industry groups have expressed their strong approval of the provision, which they say will provide cash for hard hit businesses to finance ongoing operations, retain jobs and in some cases remain open.
Other Provisions & Offsets Included in the Act
The Act also includes the following provisions:
- Extension of home-buyer tax credit
- Extends through April 30, 2010 the $8,000 first-time home buyer tax credit established by the Recovery Act.
- Provides a new $6,500 home buyer tax credit to existing homeowners that opt to purchase a different primary residence.
- If binding contract on a home by April 30, 2010, credit available if close within 60 days.
- Income caps for credit eligibility raised to $125,000 for individuals and $225,000 for married persons.
- Extension of unemployment insurance benefits for 14 weeks in all 50 states, and up to 20 more weeks in states with a three-month average total unemployment rate of at least 8.5%.
Revenue offsets include:
- Extension through June 30, 2011 of the 0.2% FUTA surtax.
- Increased failure-to-file penalties for S corporations and partnerships.
- Delayed effective date for the worldwide interest allocation benefit until tax years after 2017. The worldwide interest allocation rules, enacted in 2004, but originally to take effect in 2009, would allow multinational corporations to include interest expense of foreign subsidiaries in their worldwide interest allocations. This would likely increase the amount of foreign tax credit available to such companies.
- Extension of home-buyer tax credit