Feb 8, 2010
WHBAA – How to Leverage EXPANDED NOL Legislation
The Worker, Homeownership, and Business Assistance Act (WHBAA), signed into law on November 6, 2009, once again amended the tax law concerning net operating losses (NOLs).
NOTE: An NOL is the excess of business deductions (computed with certain
modifications) over gross income in a particular tax year. This loss can be
deducted in another tax year where gross income exceeds business
deductions. When deducted against previous years, the NOL is said to have
been "carried back." Alternatively, a taxpayer can "carry forward" an NOL
for up to 20 years.
Under this new legislation ANY taxpayer who suffered a business loss during 2008 and/or 2009 (except any taxpayer who received TARP funds) may elect to offset the loss against income earned in up to five prior years, rather than two.
Previously, the American Recovery and Reinvestment Act (ARRA), signed into law on February 17, 2009, provided that "eligible small businesses" that incurred an NOL in 2008 could make the expanded election. See ARRA Client Alert for further details on ARRA legislation.
WHBAA serves to expand not only the pool of eligible taxpayers, but also to extend the tax years at issue; where ARRA was limited to NOLs incurred in 2008, WHBAA applies to NOLs incurred in 2008 and 2009.
This means virtually all taxpayers who suffered big business losses in 2008 and/or 2009, given the state of the economy, can use those losses to offset income earned before the recessionary effects were felt. This could provide taxpayers with a much needed quick cash infusion by generating a refund of taxes already paid. Further, the IRS provides accelerated methods by which to claim a refund, to get the cash in business owners' pockets now, rather than later (see below).
MAXIMIZING THE CARRYBACK
The new NOL rules, under both WHBAA and ARRA, could result in a refund by allowing a taxpayer to offset income that has already been taxed. Under the traditional rules, a taxpayer could not use an NOL to offset income from the third, fourth or fifth year preceding the NOL, and therefore could not receive a refund for taxes paid in these years.
ARRA allowed only small businesses to carry back their losses generated during tax year 2008. WHBAA allows virtually all taxpayers take advantage of this potential refund opportunity.
WHBAA example: ABC, LLC has an applicable NOL (i.e., an NOL which arose in tax years ending after December 31, 2007 and before January 1, 2010). ABC, LLC had taxable income in 2005 (on which it paid federal taxes), but no taxable income in 2006 or 2007. Under the traditional rules, ABC, LLC would only have the option to carry back the NOL to 2006 or 2007, where it was of no use to the company. ABC, LLC would have to wait until later years when it had taxable income to carry forward the NOL and receive a tax benefit. Now, under WHBAA, ABC, LLC will receive a refund of some (or even all) of the taxes it paid on the 2005 income.
Points to consider:
1. The election is irrevocable, and can in general only be made for one tax year. Thus, taxpayers must consider—in which preceding year will a carryback generate the most tax savings?
If the applicable NOL is equal to the total combined income for all three preceding years (or greater), then the NOL should be carried back to the fifth year so it could be utilized in all three years. Any remaining NOL could still then be used to offset 2009 income (if any), or carried forward to future years. In this way, a taxpayer takes full advantage of the new law.
On the other hand, if the applicable NOL is less than the total combined income for all three years, it would be most beneficial to carry the NOL back to the year in which the taxpayer's income was taxed at the highest rate, because this will generate the highest refund.
2. Under WHBAA, the amount of an NOL that a taxpayer elects to carry back to the fifth taxable year is limited to fifty percent of the taxpayer's taxable income for that fifth taxable year.
This limit does NOT apply to the other preceding years, and does NOT apply to elections made by small businesses under ARRA.
Any remaining NOL can fully offset taxable income in the remaining four carryback years.
3. Small businesses that already carried back certain 2008 losses under ARRA can ALSO now carry back their 2009 losses under WHBAA!
WHBAA: An eligible taxpayer is any taxpayer with business losses under Section 172 of the Internal Revenue Code EXCEPT taxpayers that received certain benefits under the Emergency Economic Stabilization Act of 2008 (i.e., TARP recipients), regardless of whether the TARP funds were paid back.
Further, life insurance companies, under Section 810(b) of the Internal Revenue Code, are now eligible to carry back applicable losses from operations.
ARRA: An eligible taxpayer must be a small business (i.e., a corporation or partnership or limited-liability company) whose average annual gross receipts (as defined under Code section 448(c), and modified by the ARRA) are $15 million or less, for the three-year tax period (or shorter if the entity has not been in existence for three years) ending with the tax year before the year in which the loss arose.
NOTE: The normal two-year carryback period remains available for businesses that do not qualify as an eligible small business, or for taxpayers who do not elect the special carryback provision.
MAKING THE ELECTION
In order to take advantage of the expanded carryback provisions created under WHBAA, procedure must be followed and deadlines must be met. Much is dependent on the status of the taxpayer's 2009 return.
In general, a taxpayer must make the WHBAA election by the due date (including extensions) for filing their 2009 income tax return. This is true regardless of whether the election is made for losses incurred in 2008 or 2009.
The election is made in one of two ways:
Attach an election statement to the federal income tax return, or amended return, for the tax year in which the loss incurred; OR
Attach an election statement to the carryback form itself.
Election Statement: The taxpayer must state the following: (1) It is electing to apply Section 172(b)(1)(H) (or Section 810(b)(4) in the case of a life insurance company) under Rev. Proc. 2009-52; (2) It is not a TARP recipient, nor was it a TARP recipient during 2008 or 2009; and (3) The length of the carryback period (three, four or five years).
Carryback form: Form 1045 for individuals, and Form 1139 for corporations is used to specifically elect NOLs to be carried back to previous years. Using the carryback form, as opposed to filing an amended return for previous years, will accelerate payment of any refund. Thus, it is preferable for a taxpayer to file a carryback form (with the appropriate election statement) for taxable years where the income tax return was already filed, rather than file an amended income tax return.
Already filed a two-year carryback for 2008? No problem! Taxpayers may now make the WHBAA election by either filing an amended 2008 return, or simply filing an amended carryback form for 2008. Be sure that the election statement is included.