Obama Signs Legislation Expanding NOL Carryback

On Nov. 6, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009, H.R. 3548 (“WHBAA”), which was previously cleared by the House of Representatives on Nov. 5 and the Senate on Nov. 4, and includes a provision that permits taxpayers with net operating losses (NOLs) for tax years ending after Dec. 31, 2007, and beginning before Jan. 1, 2010 to carry back the loss from one tax year to up to five tax years.

Unlike the previous extended NOL carryback provision that was enacted for 2008 by the American Recovery and Reinvestment Act of 2009 and only applied to certain eligible small businesses with gross receipts of less than $15M, the WHBAA does NOT include a gross receipts limitation. Thus, any business not otherwise excluded may take advantage of this provision.  Specifically, WHBAA extends the NOL carryback period to five years for businesses incurring losses in tax years beginning or ending in 2008 or 2009, but not both. Eligible small businesses that previously elected to carryback 2008 losses may carryback losses from 2009. A business may elect the carryback for up to five years to offset 50 percent of taxable income in the fifth year and 100 percent in the remaining four carryback years. A business must make the irrevocable election by the extended due date of the tax return for its last taxable year beginning in 2009. It is anticipated that the procedures for making the election will be substantially similar to those prescribed by Rev. Proc. 2009-26 for eligible small business (see the Joint Committee on Taxation, Technical Explanation of Certain Revenue Provisions of the Worker, Homeownership, and Business Assistance Act of 2009 (JCX-44-09), Nov. 3, 2009).

Businesses not eligible for the extended NOL carryback include Troubled Assets Relief Program (TARP) recipients or members of a consolidated group that includes a TARP recipient. For example, if the Federal government acquires an equity interest in a taxpayer during 2010 or in later years, the taxpayer will not be entitled to the extended NOL carryback rules and will have to file amended returns if it previously claimed the extended carryback. Similarly, if a taxpayer with an NOL in 2008 joins an affiliated group that includes a TARP recipient in 2009, it may not utilize the extended carryback rules for its 2008 NOL, and would have to amend prior filings to reflect its permitted carryback period.

The WHBAA also suspends the 90 percent limitation on the use of any alternative tax NOL deduction attributable to carrybacks of the applicable NOL for which an extended carryback period is elected, effective for taxable years ending after Dec. 31, 2002.

As a result of the enactment of WHBAA, a business should analyze its current federal income tax position in order to optimize its NOL generated in 2008 or 2009. For 2009, accounting methods should be considered to help increase the current year NOL to carryback to profitable years by accelerating deductions and deferring revenue.