NOL Carrybacks For Businesses Large And Small - A Narrow Window Of Opportunity

The Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"), as signed into law by President Obama Nov. 6, 2009, creates a narrow window of opportunity for taxpayers of all sizes with net operating losses to obtain immediate tax refunds. Pursuant to the Act, a taxpayer with a net operating loss ("NOL") generated in either 2008 or 2009 may elect to carry back the NOL for up to five, instead of the usual two, prior taxable years. This temporary expansion of the NOL carryback rules could mean significant tax refunds for taxpayers who have suffered substantial losses in 2008 or 2009.

Net Operating Losses A taxpayer has an NOL when, for a given taxable year, its allowable deductions exceed its gross income. Without regard to amendments made by the American Recovery Reinvestment Act of 2009 (the "Recovery Act") and the Act, an NOL may be carried back two taxable years prior to the taxable year of the loss, or carried forward to the 20 years succeeding the loss year. An NOL may be more valuable if it can be carried back to a prior year because it will result in an immediate tax refund. Taxpayers entitled to carry back and carry forward NOLs include C corporations, individuals, and owners of pass-through entities (such as partnerships, limited liability companies and S corporations), who may use their distributive shares to calculate individual or corporate NOLs.

The Recovery Act, which was enacted earlier this year, included a one-time-only expansion of the NOL carryback period by permitting a taxpayer with an NOL generated in 2008 to elect to carry back the NOL for up to five preceding taxable years. However, only small business owners (generally defined as corporations or partnerships with average annual gross receipts of $15 million or less for the three taxable year period ending with the year of the loss) were eligible to make this election. As a result of this limitation, many individuals and larger corporate taxpayers were unable to benefit from this tax relief.

The Act's Changes to the NOL Carryback Rules Expansion of Taxpayers Eligible for Relief

The Act removes the Recovery Act's restrictions on eligible taxpayers, thus permitting taxpayers of all sizes to recoup taxes paid in prior years by electing to carry back NOLs for up to five taxable years prior to the taxable year of loss. The result is that taxpayers generally may now utilize their net operating losses realized in either 2008 or 2009 to offset earnings aggregated...