As you may know, the economic stimulus law passed in February includes key provisions that allow struggling small businesses to re-file their taxes to carry back net operating losses (NOLs) up to five years. Result: Qualifying small businesses with losses can get immediate refunds of income taxes paid in prior years.
But how, exactly, does it work? There are decisions and deadlines you have to make. For an expert view on how to take advantage of this stimulus bill tax break for small business, we’re including a guest post below from William Massey, Sr. Tax Analyst in the Tax & Accounting arm of Thomson Reuters, a top provider of tax info and solutions to accounting and tax professionals.
From William Massey, Senior Tax Analyst, Thomson Reuters:
Important decisions must be made for an eligible small business to achieve maximum tax savings from this provision. The IRS has issued favorable guidance on this provision and says that it will act quickly to get refunds to businesses carrying back losses under the new rule. But, in addition to making correct choices, a business must follow certain filing procedures to qualify for this important tax break and, in some cases, must do so before April 18, 2009.
Details of the new NOL carryback:In general, NOLs may be carried back two years and forward 20 years (different rules apply for certain specialized types of losses and the carryback period may be waived). For NOLs arising in a tax year beginning or ending in 2008, the Recovery Act permits eligible small businesses (ESBs) to elect to increase the NOL carryback period from two years to three, four, or five years. For calendar year businesses, the election is available only for 2008. A fiscal-year taxpayer whose year ends in 2008 can make the election either for its fiscal year ending in 2008 or its fiscal year beginning in 2008 and ending in 2009, but not both.
An ESB is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) with average annual gross receipts of $15 million or less for the three-tax-year period (or shorter period of existence) ending with (as clarified in the IRS guidance) the tax year in which the loss arose (as opposed to the tax year before the year of the loss, as some had read the statutory language). The IRS interpretation generally is more favorable to taxpayers because, for example, more calendar year taxpayers would qualify using 2008 receipts rather than 2005 receipts, when economic conditions were much better.
In determining whether a partnership or S corporation qualifies as an ESB, the gross receipts test applies at the partnership or S corporation level but the election is made by the partner or S shareholder, as the case may be.
Deadlines for making the election:A taxpayer who already filed a 2008 return may still make the election to use a three, four or five year carryback by the later of: (A) six months after the due date of the return (determined without extensions), or (B) April 17, 2009. A taxpayer who previously elected to waive the normal two-year carryback period may undo it and make a new election no later than April 17, 2009. A taxpayer who has not filed a return for the year of the loss, has until the later of: (A) the due date (with extensions) of the return for the year of the loss, or (B) April 17, 2009 to make the election.
Deciding which choice or choices to make:Small businesses with a qualifying NOL must decide whether to waive the carryback period or to use a two, three, four or five year carryback period. Fiscal year filers have the added choice of which year to use. These choices are quite complex and require a detailed examination of the tax picture of the business. The key factor in deciding whether to elect to carry an NOL back three, four, or five years should be which election will result in the largest tax savings. It is especially important to make the right choice because once made, the choice is irrevocable.
Getting a quick refund: Corporations making the election can get a quick refund by filing Form 1139. Individuals use Form 1045 to get a quick refund. The IRS has supplied detailed instructions as to what information must accompany these forms.