Under current law, a taxpayer generally may carryback a net operating loss (NOL) to the two taxable years preceding the year the NOL arises. Any amount of the NOL not carried back can be carried forward for up to 20 years. Earlier this year, special rules were enacted for an Eligible Small Business (generally businesses whose annual gross receipts do not exceed $15 million) to carryback certain NOLs for three, four, or five years. (See Ballard Spahr Legal Alert "IRS Interpretation of Stimulus Act NOL Provisions Benefits Individual Taxpayers," April 10, 2009.)

The Worker, Homeownership, and Business Assistance Act of 2009 (Act), which became law on November 6, 2009, allows almost all taxpayers to carryback applicable NOLs three, four, or five years. An applicable NOL is an NOL arising in any tax year ending after December 31, 2007, and beginning before January 1, 2010. Under the Act:

  • A taxpayer must make a timely election under rules prescribed by the Treasury to take advantage of the extended carryback period.
  • The election may be made only for NOLs arising in a single tax year, not both years. An Eligible Small Business that elected to carryback 2008 NOLs for an extended period, however, also may make a new (second) extended carryback election for 2009 NOLs.
  • The amount of the applicable NOL that may be carried back to the fifth tax year before the loss year is limited to a maximum of  50% of the taxpayer's taxable income in that fifth preceding tax year. This 50% limitation does not apply to applicable NOLs carried back three or four years or to a 2008 NOL an Eligible Small Business elected to carryback five years.
  • Generally, an NOL cannot offset more than 90% of a taxpayer's alternative minimum taxable income. The Act suspends this 90% limitation with respect to the carryback of an applicable NOL for which the extended carryback period is elected.
  • A taxpayer may revoke any election to waive the carryback period with respect to an applicable NOL for a tax year ending before November 6, 2009, by the due date (with extensions) for filing the tax return for the taxpayer's last tax year beginning in 2009. The ability to revoke the election gives taxpayers the opportunity to carryback current or recent losses to profitable years and receive a refund. An application for a tentative carryback adjustment with respect to such loss is treated as timely filed if filed by the due date for filing the tax return for the taxpayer’s last tax year beginning in 2009, as extended.
  • The right to elect an extended carryback period does not apply to any taxpayer that is a TARP recipient or any taxpayers related to a TARP recipient at any time in 2008 or 2009.  The legislative history indicates that repayment of a TARP investment does not restore eligibility for the election. 

If you want any additional information about the expanded NOL carryback, please contact Wayne R. Strasbaugh (strasbaugh@ballardspahr.com 215.864.8328), Jeffrey R. Davine (davine@ballardspahr.com 303.299.7312), or Wendi L. Kotzen (kotzenw@ballardspahr.com 215.864.8305). 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.