This is Jean Wetzler.
I'm talking with Monica Baker about the American Recovery and Reinvestment Act of 2009 and how that new legislation may affect net operating losses for some small business returns.
Monica, what is a net operating loss?
Generally if your business deductions for the year are more than your business income for the year, you may have a net operating loss, or NOL.
An NOL year is the year in which an NOL occurs.
If you have an NOL in one tax year, you may carry the loss to other years and deduct it.
The rules for figuring an NOL, how much of it may be applied in each tax year, and how much may be carried to the next tax year are explained in IRS Publication 536, When to Use an NOL.
What is the tax benefit to a small business?
You may be able to get a refund of all or part of the income tax you paid for past years, or you may be able to reduce your income tax in future years.
For example: Your deductible business loss for tax year 2008 exceeded your taxable income and resulted in a Net Operating Loss.
You would first carry the NOL back to tax year 2006, and if not completely used up, the unused portion would carry forward to 2007.
What did the Recovery Act legislation change?
The new law enables small businesses with a net operating loss in 2008 to elect to offset this loss against income earned in up to five prior years.
Add this change to the economic downturn, and we expect record numbers of small businesses to be eligible for the refunds.
The IRS is taking special steps to ensure we process them timely to help small businesses during this difficult period.
Small businesses with large losses in 2008 may be able to benefit fully from those losses now, rather than waiting to claim them on future tax returns.
What do small business taxpayers need to do?
To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL.
Generally small businesses that are not corporations, including sole proprietorships filing Schedule C with their Form 1040, may accelerate a refund by using Form 1045, Application for Tentative Refund.
Corporations with NOLs may also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.
It sounds like there are a lot of considerations.
Where can someone find more information on net operating losses?
You're right - there are quite a few considerations.
It's really important to understand the rules, compute the NOL correctly, and keep accurate records.
The IRS released legal guidance in Revenue Procedure 2009-19 outlining specific details.
In addition to Publication 536, we've posted Frequently Asked Questions on the IRS.gov Web site.
Small businesses that file Form 1040 can also call 1-800-829-1040 with NOL questions.
Corporations can call 1-800-829-4933.
Thank you, Monica.
I've been talking with Monica Baker of the IRS.
This is Jean Wetzler.
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