Recent Additions

How to Elect New Five-Year Carryback Period for 2008 Losses By Carla Neeley Freitag, Esq. TaxResearchAndWriting.com, Merritt Island, FL The American Recovery and Reinvestment Act of 2009 (2009 ARRA or Act) added §172(b)(1)(H), which temporarily extended the net operating loss (NOL) carryback period from two to up to five years for qualified small businesses.1 Eligible businesses are those which received an average of not more than $15 million in gross receipts for the three-year period ending with the loss year.2 Carryback Period Under the general rule, the carryback period for NOLs is the two years preceding the loss year.3 In certain circumstances, a longer or shorter carryback period is allowed. Under the new law, an eligible small business may elect to use a three-, four-, or five-year carryback period. If it would prove beneficial, a taxpayer may waive the carryback period altogether and carry the loss forward.4 Whether or not an election or waiver is made, the carryover period is the 20 years following the loss year.5 Eligible Small Businesses The new five-year carryback option for 2008 losses is available to a corporation, partnership, or sole proprietorship if its average annual gross receipts for the three-year taxable period ending with the loss year do not exceed $15 million.6 Qualifying taxpayers are referred to as “eligible small businesses.” If a partnership, S corporation, or sole proprietorship is an eligible small business, the partners, shareholders, proprietor, respectively, may elect the extended carryback period.7 Applicable 2008 Net Operating Loss The term “applicable 2008 net operating loss” refers to:8 • The taxpayer's NOL for any taxable year ending in 2008; or • If the taxpayer elects, the taxpayer's NOL for any taxable year beginning in 2008. The year of the applicable 2008 net operating loss is referred to as the loss year. Calendar year taxpayers. If a taxpayer determines its tax liability on a calendar year basis, the taxpayer's loss year is 2008, because the tax year ends on December 31, 2008. The maximum five-year carryback period is 2003 through 2007. Fiscal year taxpayers. For fiscal year taxpayers, the loss year is the fiscal tax year either ending or beginning in 2008. For example, assume that a fiscal year taxpayer ends its taxable year on March 31. If a taxpayer had a net operating loss for the fiscal year ending on March 31, 2008, such loss would be the applicable 2008 net operating loss. The loss year is 2008. The maximum five-year carryback period is 2003 through 2007. On the other hand, if a taxpayer did not incur a NOL for the fiscal year ending March 31, 2008, the taxpayer still has another chance to elect the five-year carryback period if the taxpayer has a net operating loss for the fiscal year beginning on April 1, 2008, and ending on March 31, 2009. In that case, the loss year is 2009. The maximum five-year carryback period is 2004 through 2008. If a fiscal year taxpayer incurs a NOL for a fiscal year ending in 2008, absent unusual circumstances, the taxpayer should make an election for that year. There are two practical reasons why. First, the earlier the tax year of the applicable 2008 net operating loss, the sooner the taxpayer receives a tax refund. Also, usually a taxpayer is unable to predict with certainty whether a future year will produce a NOL. A taxpayer may not have an opportunity to use the five-year carryback period if there is a profit for the fiscal year ending March 31, 2009. IRS Guidance for Making Election A taxpayer must affirmatively elect to apply the extended carryover period.9 The election is irrevocable.10 The IRS issued Rev. Proc. 2009-19 11 on March 16, 2009, to provide guidance to taxpayers seeking to take advantage of the extended carryover period. After hearing that numerous taxpayers failed to make a valid election using Rev. Proc. 2009-19, the IRS issued Rev. Proc. 2009-26,12 on April 24, 2009, to modify and clarify the earlier revenue procedure. According to Rev. Proc. 2009-26, the earlier revenue procedure is “modified, and, as modified, superseded.”13 Thus, it appears that information in Rev. Proc. 2009-19 will continue to apply to the extent not specifically modified and superseded by Rev. Proc. 2009-26. The procedure for making an election for the carryback of an applicable 2008 NOL depends upon whether the taxpayer has filed the tax return for the loss year. If the return was already filed, the procedure further depends upon whether the taxpayer elected to waive the general two-year carryback period under §172(b)(3). Return Not Filed. If the income tax return has not yet been filed, a taxpayer elects to use the extended period by attaching a statement to a timely filed return for the taxable year in which the loss arises.14 The statement must clearly state that the taxpayer is electing to apply §172(b)(1)(H) and must describe whether the taxpayer is electing a three-, four-, or five-year carryover period.15 The IRS advises that, if the taxable year of the applicable 2008 NOL ends before February 17, 2009, the election must be made by the later of the due date (including extensions) for filing the taxpayer's return or April 17, 2009.16 Returned Filed and No Carryback Waiver. If an eligible small business has already filed a return for the loss year and did not elect to waive carryback, then the business can either apply for a refund or file an amended return.17 No particular statement or label is required on either form.18 If a taxpayer files an amended return, the return should be filed for the earliest year in the extended carryback period.19 The return for the loss year does not have to be amended. The appropriate form must be filed on or before the later of the date that is six months after the due date (excluding extensions) for filing the taxpayer's return for the taxable year of the applicable 2008 NOL or April 17, 2009.20 If a taxpayer makes the election by filing an appropriate form that amends a prior refund claim, the amendment also will apply to a carryback of any alternative tax NOL for the same taxable year.21 Return Filed with Carryback Waiver. A taxpayer may elect to relinquish the carryback period for an ordinary NOL under §172(b)(3). If an eligible small business has already filed a return for the loss year and elected under §172(b)(3) to waive carryback of an applicable 2008 NOL of a tax year ending before February 17, 2009, it may still be able to use the extended carryback period by revoking the waiver.22 The revocation of the election to forgo carryback and the election to use the new five-year carryback period are made by typing or writing the following legend on the applicable form: Revocation of NOL Carryback Waiver Pursuant to Rev. Proc. 2009-19.23 The revocation and election must have been filed on or before April 17, 2009.24 Conclusion By following the procedures outlined in Rev. Proc. 2009-26 for applicable 2008 NOLs, a taxpayer may elect to apply a five-year carryback period instead of a two-year carryback period. This strategy can result in significant refunds of taxes previously paid. 1 §172(b)(1)(H)(i)(I), as added by the American Recovery and Reinvestment Act of 2009, P.L. 111-5, §1211(a) (Feb. 17, 2009), effective for NOLs arising in taxable years ending after Dec. 31, 2007, unless provided otherwise. P.L. 111-5, §1211(d)(1). See also IRS News Release, Questions and Answers for ARRA §1211 5-Year Net Operating Loss Carryback Election for Small Businesses (Mar. 16, 2009). 2 §172(b)(1)(H)(iv), as added by the 2009 ARRA. 3 §172(b)(1)(A)((i). 4 §172(b)(3). 5 §172(b)(1)(A)(ii). 6 §172(b)(1)(H)(iv), as added by the 2009 ARRA, referring to §172(b)(1)(F)(iii) (definition of “small business” for purposes of an extended carryback period for “eligible losses”) and §448(c) (gross receipts test). 7 See Rev. Proc. 2009-26, §1.03. 8 §172(b)(1)(H)(ii), as added by the 2009 ARRA. 9 §172(b)(1)(H)(iii), as added by the 2009 ARRA. 10 Id. 11 2009-14 I.R.B. 747. 12 2009-19 I.R.B. 935. 13 Id., §5. 14 Id., §4.01(2). 15 Id. A taxpayer may choose a period which is more than two years and less than six years before the loss year. §172(b)(1)(H)(i)(I), as added by §1211(a) of the 2009 ARRA. According to Rev. Proc. 2009-19, a statement must also indicate whether the taxpayer is electing to apply §172(b)(1)(H) to the taxable year that begins in 2008 rather than, under the general rule, to the taxable year ending in 2008. Rev. Proc. 2009-19, §4.01(1)(c). 16 Rev. Proc. 2009-26, §4.01(2). See §172(b)(1)(iii), as added by the 2009 ARRA. Rev. Proc. 2009-19 states that a discretionary extension under Regs. §301.9100-2 may be available if an election was not timely made. Rev. Proc. 2009-19, §4.01(2). 17 Rev. Proc. 2009-26, §4.01(3)(a)(i). Corporations file either Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return. Individuals file either Form 1045, Application of Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return. Id. In the case of an amended application for a tentative carryback adjustment, the 90-day IRS review period described in §6411(b) begins on the date the amended application is filed. Id., §4.01(3)(c). 18 Rev. Proc. 2009-26, §4.01(3)(a)(i). Rev. Proc. 2009-19 required that a special legend must be typed or printed across the applicable form stating “2008 NOL Carryback Election Pursuant to Rev. Proc. 2009-19.” The legend requirement was superseded by Rev. Proc. 2009-26, §4.01(3)(a)(i). 19 Id., §4.01(3)(a)(ii). 20 Id., §4.01(3)(b). 21 Id., §4.01(3)(c). 22 Id., §4.02. Absent this situation, the election to waive carryback is irrevocable. §172(b)(3). 23 Id. Rev. Proc. 2009-26 provides that the language for the revocation refers to Rev. Proc. 2009-19 rather than to Rev. Proc. 2009-26. Id. 24 Id.

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