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TAX NEWS - January 2010

Tax controversy updates: NOL carryback period extended

In the current downturned economy, many taxpayers incurred or will be incurring net operating losses (NOLs) that may be carried back. The Worker, Homeownership, and Business Assistance Act of 2009 (the Act), enacted on November 6, 2009, provides a temporary election to extend the NOL carryback period to five years (rather than the normal two years) for U.S. companies of every size, with the exception of TARP Recipients.


Background

IRC Section 172 provides for a deduction equal to the aggregate amount of NOL carryovers and carrybacks to a tax year. More specifically, the NOL for any taxable year must generally be carried back to each of the two preceding tax years and/or forward twenty years from the year in which the NOL was incurred. Spurred by the current economic downturn, the Act amended IRC ยง 172(b)(1)(H), which enables companies to make an irrevocable election to extend the NOL carryback period to three, four, or five years for an NOL incurred in a tax year ending in 2008 or 2009. Taxpayers may also make an irrevocable election to relinquish the NOL carryback period for any particular tax year.


NOL carryback and eligible small businesses

An election under the Act may be made only with respect to one taxable year. An Eligible Small Businesses (ESB) that has elected an extended NOL carryback pursuant to the provisions of the American Recovery and Reinvestment Act of 2009, prior to the enactment of this Act, may make the election for two taxable years.

Pursuant to Section 172(b)(1)(H)(iv), an ESB is a sole proprietorship, partnership or corporation that meets the $15 million gross receipts test under Section 448(c). The gross receipts test is applied to a taxpayer's prior taxable year by computing the average annual gross receipts for the three-year period that ends with that prior taxable year. As such, the taxable year in which the NOL arose is the last taxable year of the three-year period to which the $15 million gross receipts test is applied. Note, that although the gross receipts test is applied at the separate entity level, the aggregation rules under Section 448(c) dictate that entities with common ownership may be required to combine their gross receipts for purposes of calculating the $15 million gross receipts test.


NOL carryback limitations - 50% limitation for year 5

The Act limits the amount of NOL carryback to the fifth preceding taxable year. The carryback to the fifth preceding taxable year shall not exceed fifty percent of the taxpayer's table income in that year, computed without regard to any NOL carryback. Taxpayers may carry back one hundred percent of taxable income in the remaining four carryback years. The fifty percent exception does not apply to an ESB.


NOL carryback limitations - TARP recipients

The extended NOL carryback is not available to taxpayers who have received assistance under TARP, as well as, members of an affiliated group if any member received assistance under TARP.


Loss from operation of life insurance companies

Section 810 provides for a deduction equal to the aggregate amount of Operations Losses (OL) carryovers and carrybacks to a tax year for Life Insurance Companies (LIC). More specifically, the OL of a LIC for any taxable year must generally be carried back to each of the three preceding tax years and/or forward fifteen years from the year in which the OL was incurred. Spurred by the current economic downturn, the Act amended Section 810(b), to allow LIC to make an irrevocable election to extend the NOL carryback period to four or five years for an OL incurred in a tax year ending in 2008 or 2009. Taxpayers may also make an irrevocable election to relinquish the NOL carryback period for any particular tax year.

Similar to the NOL provisions, an election to extend the OL carryback may be made only with respect to one taxable year. Additionally, the Act limits the amount of OL carryback to the fifth preceding taxable year by not allowing the amount to exceed fifty percent of the taxpayer's table income in that year, computed without regard to any OL carryback.
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