expanded NOL carryback: Reid, Baucus float expanded NOL carryback proposal

Senate Majority Leader Harry Reid, D-Nev., and Finance Committee Chairman Max Baucus, D-Mont., are expected to offer a four-year net operating loss (NOL) carryback relief proposal as an amendment to unemployment insurance benefits extension legislation that is slated to be on the Senate floor the week of October 25. (The House approved a 13-week extension of unemployment benefits on September 22, but that legislation does not include any tax provisions.)

According to a draft statutory language circulated October 22, the proposal would:
- Allow a three- or four-year carryback (versus two years under current law) for an NOL arising in taxable years ending or beginning in 2008 or 2009. A taxpayer could elect to apply the extended carryback to only one of those years, not both.
- Reduce the carryback NOL by a 20 percent "haircut."
- Exclude taxpayers in which the government has taken or has the right to take an equity interest under the Emergency Economic Stabilization Act of 2008 (Troubled Assets Relief Program recipients) or taxpayers that are part of a consolidated group that includes a TARP recipient.

Significantly, the proposal does not contain a gross receipts test, so it would apparently be available to all businesses other than those specifically excluded.

However, it appears that the proposal would also replace the small business NOL carryback relief enacted earlier this year as part of the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). ARRA allows an election to extend the NOL carryback period for losses arising in 2008 from the current-law two years to three, four, or five years with respect to small business taxpayers with gross receipts of $15 million or less. The Reid amendment could subject small business NOLs for 2008 to the 20 percent haircut and reduce the carryback period from five to four years.

The amendment also would extend the $8,000 first-time homebuyer tax credit that was included in the ARRA.

These provisions would be offset by an additional six-year delay (through 2016) in the effective date of the worldwide interest allocation.

Earlier in the week, House Speaker Nancy Pelosi, D-Calif., indicated that she would support extending the NOL carryback provision enacted in the ARRA through 2010, although she did not indicate whether she was in favor of making the incentive available to all businesses.

Pelosi also backed a one-year extension (through 2010) of the 50 percent bonus depreciation enacted in the Economic Stimulus Act of 2008.


Estate tax fix gaining momentum

In other developments, House Majority Leader Steny Hoyer, D-Md., announced October 20 that his chamber would soon be considering legislation to address the estate tax, and that the measure may be yoked to legislation to enact a statutory pay-as-you-go (PAYGO) law. Under current law, the estate tax is scheduled to sunset in 2010 and reappear in 2011 with a top tax rate of 55 percent and a unified credit exemption amount of $1 million (the levels in effect before the Bush tax cuts were enacted in 2001).

Ways and Means Committee Chairman Charles Rangel, D-N.Y., said October 22 that House taxwriters currently are drafting legislation that would permanently freeze the estate tax at its 2009 levels (a top rate of 45 percent and exemption amounts of $7 million for couples and $3.5 million for individuals) and are prepared to offer it when the House floor schedule permits. The Joint Committee on Taxation (JCT) estimates that this change would cost $233.6 billion over 10 years.

Lawmakers are also mulling a temporary patch that would freeze the 2009 estate tax rates and exemption amounts for 2010 only. The JCT estimates this option would raise approximately $1 billion over the next five years.

No room for extenders – Rangel indicated that the upcoming legislation would not be combined with legislation to extend individual and business tax provisions that are set to expire in 2009.

Pay-as-you-go – The Congressional budget resolution passed earlier this year makes room in the budget for the cost of permanent estate tax reform, meaning that these measures would not need to be offset with corresponding revenue raisers. However, Pelosi and Hoyer pledged in April that the House will not consider any legislation related to the estate tax unless the bill includes a statutory pay-as-you-go (PAYGO) provision, the bill is fully offset under traditional scorekeeping, or statutory PAYGO has already been enacted into law. Pelosi and Hoyer made this pledge to gain the support of fiscally conservative Blue Dog Democrats, who had sought a statutory PAYGO provision throughout the course of budget negotiations.


Health care negotiations ongoing

As lawmakers were publicly staking out their positions on the NOL carryback and the estate tax, negotiations on health care reform legislation continued behind the scenes. Negotiators in both the House and Senate continue to form their respective bills, with the goal of floor consideration in both chambers in early November.