Jeff Wilmes

The Worker, Homeownership, and Business Assistance Act of 2009 (the act), signed into law by President Obama on November 6, 2009, includes provisions that enhance the ability of taxpayers to carry back net operating losses. With the provisions added by the act, most taxpayers can now choose to carry back losses from years ending after December 31, 2007, and beginning before January 1, 2010, to the previous three, four or five years instead of the normal two-year carryback period.

Eligible small businesses (generally corporations, LLCs, partnerships and sole proprietorships whose average annual gross receipts for the three years ending with the NOL year is $15 million or less) can elect a three, four or five year NOL carryback period for up to two of the tax periods ending after December 31, 2007, and beginning before January 1, 2010. If the taxpayer is a calendar-year taxpayer, this would mean the extended carryback opportunity exists for the 2008 and 2009 calendar years. If the taxpayer is a fiscal-year taxpayer, there will be three tax years that will end after December 31, 2007, and begin before January 1, 2010. The small business can elect to take the extended carryback opportunity for up to two of the three years in certain circumstances. The $15 million gross receipts test is made at the corporation, partnership or sole proprietorship level (not the partner or S corporation shareholder level). Related businesses are required to aggregate their gross receipts for purposes of the $15 million test.

Since flow-through entities (S corporations, partnerships, LLCs) do not generally pay income taxes, the NOL election for flow-through losses is made at the shareholder, partner or LLC member level. Thus, for example, a partner in a partnership could make the election to carry back its share of the partnership loss to three, four or five years. In certain cases for 2008 net operating losses, the amount of NOL this partner could carry back to the three, four or five years would be either:

• the lesser of its distributive share of the partnership’s loss or
• the partner’s actual NOL for the year

Taxpayers that are not eligible small businesses (or owners of flow-through entities that are not eligible small businesses) can elect a three, four or five year carryback for one tax year that ends after December 31, 2007, and begins before January 1, 2010. Hence, these taxpayers will need to decide which would be the best year to elect a longer carryback period since the election can be made for only one year. If a taxpayer that is not an eligible small business (or an owner of a flow-through entity that is not an eligible small business) elects a five-year carryback period, the amount of loss that can be carried back to the fifth preceding year cannot be more than 50 percent of the taxable income of that fifth preceding year.