NOL Carryback: Senate OKs temporary five-year NOL carryback

The Senate voted 98-0 on November 4 to approve an unemployment insurance extension bill (H.R. 3548) with a provision that would permit businesses with net operating losses (NOLs) in tax years 2008 or 2009 to carry back those losses for five
years.


NOL carryback

The loss carryback, which was offered last week as an amendment by Senate Majority Leader Harry Reid, D-Nev., and Finance Committee Chairman Max Baucus, D-Mont., would allow businesses to elect to carry back NOLs for up to five years (from the current-law two years) for losses incurred either in 2008 or 2009 – but not both. (An earlier draft proposal that Reid and Baucus circulated October 22 would have permitted a three- or four-year carryback for losses in tax years beginning or ending in 2008 or tax years beginning or ending in 2009.)

Businesses would be able to offset 50 percent of taxable income in the fifth year and 100 percent in the remaining four carryback years. The 20 percent "haircut" on NOLs that was included in the earlier Reid-Baucus draft has been eliminated. Small businesses that have already elected to carry back 2008 losses under the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) would be permitted to carry back losses from 2009.

The extended carryback would not be available to 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.

The provision does not contain a gross receipts test, so it would be available to all businesses other than those specifically excluded.

The Joint Committee on Taxation staff estimates the provision would cost $10.4 billion over 10 years.


Other provisions

The bill also would extend the $8,000 first-time homebuyer tax credit that was included in the ARRA to May 1, 2010, and would make other modifications to the credit.

Revenue offsets include an additional seven-year delay (through 2017) in the effective date of the worldwide interest allocation election, an increase in the penalty for failure to file a partnership or S corporation return (to to $195 per partner or shareholder), and a 33 percentage point increase in the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in the third quarter of 2014. (Corporate estimated tax payments would be reduced by a corresponding margin in the following quarter.)


House approval expected

The Senate-approved bill now heads to the House of Representatives, which last month passed unemployment insurance legislation with no significant tax provisions. The House is expected to approve the new bill as is and send it to President Obama's desk for his signature by week's end.

Deloitte Tax will issue a special publication explaining the bill's tax provisions in more detail once the legislation clears Congress.