The Obama administration has just made my year-end busier. On November 7th, the President signed into law the Worker, Homeowner, and Business Act of 2009 (the “WHB 2009 Act”) which, among other things, extends the period that businesses can carry back a net operating loss (NOL) arising in either 2008 or 2009. This is a significant benefit to companies holding loss properties that can sell by year end. Losses triggered in 2009 might be available to offset income earned as far back as 2003.
Under the existing rules, a business could carry back its current year’s NOL for two years (and certain “small businesses” had been previously awarded an extended NOL carry-back period under P.L. 111-5). Thus a business with an NOL in 2008 could carry that loss back to 2006 to offset taxes paid in 2006, if any. Thereafter, any unused 2008 NOL could carry to 2007, and eventually forward to years after 2008, for a maximum of 20 years. To the extent an NOL offsets income on which taxes were previously paid, the government will make a cash refund to the business (in the amount of the overpaid taxes).
Under the WHB 2009 Act, almost all businesses (not just “small businesses”) can carry back their NOLs for a period of five years. Thus , a company with a 2008 loss may carry that loss back and offset taxes paid in 2003 and each year thereafter (until the NOL is used up). Now the fine print: (1) the five year carry-back is only available for NOLs earned in a business’s tax year ending in either 2008 or 2009; (2) generally, the election to carry back losses is only available for a single period (i.e. it cannot be made to carry back 2008 losses for five years and 2009 losses for five years, it is one or the other), however, “small businesses” that already carried back a 2008 loss five years can still elect to carry back 2009 losses for five years; (3) the amount of the NOL carried back to the 5th tax year before the year in which the NOL arose, is limited to 50% of such year’s taxable income (disregarding all NOLs properly taken in that period); and (4) any election to carry back NOLs for the extended period, as described herein, is irrevocable.
Because its provisions apply to NOLs arising in tax years ending in 2009, the WHB 2009 Act provides certain businesses with an extremely valuable planning opportunity. 2009 is not over yet, and a business that is in a position to benefit from an extended NOL carry back period (i.e. those businesses with taxable income available to offset in 2004, 2005 or 2006) should seriously consider undergoing transactions that will increase their 2009 NOL. If a business is carrying a large loss asset on its books, 2009 might be the year to sell that asset and recognize a loss. When that NOL offsets income on which taxes were previously paid, the government will make a cash refund to the business (in the amount of the overpaid taxes). In this economy, such opportunities for immediate cash are rare, and after 2010 hits, this planning opportunity will be gone.