Barbara de Marigny
Barbara de Marigny
The ‘No Loss Left Behind’ Act

Five-year net-operating loss (NOL) carrybacks now available for all businesses.

December 10, 2009
Barbara de Marigny, JD/LLM

On November 6, 2009, President Obama signed into law P.L.111-92: Worker, Homeownership and Business Assistance Act (WHBAA). The legislation focuses on unemployment compensation and the first-time homebuyer credit but it also contains some tax provisions, the most important of which are the new net-operating losses (NOL) carryback provisions. WHBAA generously makes five-year NOL carrybacks available to all businesses, not just “small” ones, and extends the five-year carryback of 2008 NOLs to 2009 NOLs as well.

Until recent changes, NOLs generally could only be carried back two years and carried forward 20 years to offset taxable income in such years. Life insurance company losses and certain losses (casualty, disaster and farming) could be carried back three years. Taxpayers may elect to forego the two-year carryback period for an NOL and instead carry it forward.

The American Recovery and Reinvestment Act of 2009 (ARRA), enacted last February, granted to “eligible small businesses” an election to increase the carryback period for 2008 NOLs from two years to any whole number of years that is “more than two and less than six.” Of course, the phrase “more than two and less than six” is another way of saying “three, four or five.” An “eligible small business” under ARRA was defined as a corporation, partnership or sole proprietorship having average annual gross receipts no greater than $15 million for the prior three-year tax period. ARRA applied only to 2008 NOLs, i.e., NOLs from taxable years beginning or ending in 2008.

Now, WHBAA offers the lengthened five-year carryback period to taxpayers of all sizes, not just small businesses. The five-year carryback period is also available to life insurance company losses and casualty, disaster and farming losses. Companies that have been recipients of Troubled Asset Relief Program (TARP) funds do not get to use the new carryback extension.

WHBAA grants taxpayers the right to elect a five-year carryback for either 2008 or 2009 losses, but not both. This means taxpayers will have the choice of carrying back either their 2008 or 2009 NOL up to five years.

There is an exception to the “either 2008 or 2009” rule for small businesses. If a small business timely elected to carry back a 2008 NOL under the ARRA rules, it may now also carry back a 2009 NOL, thus having the ability to carry both 2008 and 2009 NOLs as far back as five years. If a small business did not timely elect with respect to a 2008 NOL, however, it is put to the same choice that larger businesses are, that is, electing to carryback only one of the NOLs either from 2008 or from 2009.

NOLs offset taxable income in the order of the taxable years to which the NOL may be carried, i.e., they first set off taxable income in the earliest or oldest year in which they may be carried, then the next earliest, etc. WHBAA has not changed this order of application but it has put a special limit on NOLs carried to the fifth preceding year.

The NOL carried back to the fifth preceding year (but not to the third or fourth preceding years) is limited to 50 percent of the taxable income for such fifth year. The NOL that is unused due to the 50-percent limitation may then be carried to taxable years subsequent to the fifth taxable year. Since this limitation was not in place when small businesses may have elected a five-year carryback under the ARRA provisions, the new 50-percent limitation does not apply to a 2008 NOL with respect to which a small business already made an election.

WHBAA has also changed the effect of NOLs on the alternative minimum tax (AMT). Previously, an NOL could not reduce the taxpayer’s AMTI by more than 90 percent. WHBAA has amended section 56(d) to suspend this limitation on carrybacks to years five, four or three preceding the loss year. If the loss is carried back to the fifth year, however, the use of the NOL against alternative minimum taxable income (AMTI) would be limited by the 50-percent cap in amended section 172, just as it is for non-AMT purposes.

The Joint Committee on Taxation issued a Technical Explanation of the WHBAA provisions (JCX-44-09) and Rev. Proc. 2009-52, 2009-49 I.R.B. (November 20, 2009) provides specific guidance regarding the timing and method of making the election.

In general, a taxpayer must make the election by the extended due date for filing the return for the taxpayer’s last taxable year beginning in 2009. For a consolidated group, the common parent makes the election, which is binding on all members of the group. In the case of pass-through entities, each partner or shareholder will make its own election to carry back its share of the entity’s NOL.

What about taxpayers that either already filed to waive the two-year carryback or took a two-year carryback and filed for a quickie refund, not knowing the legislation would be offering a better deal? Even though carryback elections are normally irrevocable, the WHBAA transition rules provide that any prior election can be revoked (and a quickie refund applied for) if the revocation is filed before the due date including extensions for the return for the last taxable year beginning in 2009.

Decision Points for NOL Carryback Choices

The NOL provisions of WHBAA have complicated the analysis of NOL carrybacks. Be sure to evaluate:

  1. Magnitude of 2008 NOL vs. 2009 NOL. If the 2009 NOL is bigger, you might offset more income carrying it back five years, rather than a smaller 2008 NOL carried back one more year.
  2. Two-Year Carryback still available. If there is both a 2008 and a 2009 NOL, although only one can be carried back five years, the other is still eligible for the regular two-year carryback.
  3. Tax Rate. If a taxpayer has income in the fifth preceding year that is taxed at the top marginal rate or, in the case of corporations, in the 38-percent “bubble” for income between $15 and $18 million, the 50 percent limit could reduce the amount of income taxed at higher rates and not the income taxed at lower rates. The NOL could then be applied to year four when it might again be put to best use against income taxed at higher rates.
  4. AMTI offset. Only an election to carry back to preceding years three, four or five can offset 100 percent of AMTI.
  5. What does next year look like? Consider whether a two-year carryback of a potential 2010 NOL could offset 2008 income and then use the 2009 NOL for earlier years.
  6. Year 5 50-percent cap. The 50-percent cap on use against year five income may make a three- or four-year carryback more advantageous.
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Barbara de Marigny, JD/LLM, is a partner in Gardere’s Tax Practice Group. Ms. de Marigny focuses her practice on federal income taxation, partnership taxation, limited liability companies (LLCs), domestic and international joint ventures, and tax planning for business transactions. She also has specific expertise in mergers and acquisitions of public and private companies in taxable and tax-free acquisitions of stock, LLC interests and partnership interests. Prior to joining Gardere, de Marigny was a partner at the law firm of Oppenheimer, Blend, Harrison & Tate, Inc. de Marigny served from 1981 to 1999 as an attorney at Baker & McKenzie. She was a partner at the firm from 1989 until her departure in 1999.