On November 6, 2009, President Obama signed The Worker, Homeownership, and Business Assistance Act of 2009 (WHBA 2009). The provisions in this legislation related to an extension of unemployment benefits for up to an additional 20 weeks, and an extension of the first-time homebuyer credit provision garnered the most publicity. WHBA 2009 also includes a significant expansion of the Net Operating Loss (NOL) carryback rules, the focus of the remainder of this Tax Alert.

 

For Federal purposes, a taxpayer can normally carry back a NOL two years and carry forward a NOL twenty years. The American Recovery and Reinvestment Act of 2009 (ARRA 2009) enacted in February 2009 allowed eligible small businesses (defined as having average gross receipts of $15 million or less) to elect to carry back NOLs from 2008 for three, four or five years rather than the standard two years. This included individuals with NOLs resulting from pass-through losses from ownership interests in partnerships and S corporations.

 

WHBA 2009 provides a similar election to all taxpayers to carry back NOLs up to five years, for an “applicable NOL” defined as a NOL for a tax year ending after December 31, 2007, and beginning before January 1, 2010. Generally a taxpayer can only avail themselves of the longer carryback period for one tax year. However, eligible small businesses that previously elected the longer carryback for a 2008 NOL are permitted to elect the longer carryback for a 2009 NOL as well.

 

Under WHBA 2009 a NOL carried back to the fifth year preceding the loss year can only offset 50 percent of the taxable income for that earlier year. Any remaining NOL can fully offset taxable income in the remaining four carryback years. This 50 percent limitation does not apply to any eligible small business that elected to carry back its 2008 NOL under ARRA 2009. However, the 50 percent limitation will apply to any 2009 NOL incurred by an eligible small business. WHBA 2009 also suspends the 90 percent income limitation on the use of NOLs for determining the alternative minimum tax (AMT) for an extended carryback year.

 

The NOL carryback changes enacted by WHBA 2009 will result in some taxpayers doing an about-face. A taxpayer that was not an eligible small business may have elected to forego the carry back of a 2008 NOL as it may have had minimal income in the two preceding years to offset against the 2008 NOL. Now with the NOL carryback period extended for all taxpayers, these taxpayers have until the due date of their 2009 tax return to revoke the election to forego a 2008 NOL carryback.

 

Less clear is how a taxpayer that has previously carried back its 2008 NOL to the two preceding years will go about “amending” the original NOL carryback to extend the carry back period to three, four or five years. The IRS deputy chief counsel’s office has announced that it is working quickly on releasing guidance for WHBA 2009.