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The Worker, Homeownership,
and Business Assistance Act of 2009 (the Act), which was signed
into law on Nov. 6, 2009, makes it easier for most businesses to
get immediate tax savings from net operating losses (NOLs). It does
so by allowing certain NOLs to be carried back to earlier, more
profitable years. In these tough economic times, that's good news
for businesses who have suffered losses recently after better years
when high taxes were paid. On the negative side, the Act defers
a scheduled drop in the FUTA (Federal Unemployment Tax Act (FUTA)
tax rate, increases penalties for certain businesses that fail to
meet return filing requirements, and boosts estimated taxes for
large corporations in 2014.
Background on NOLs. A net operating loss
(NOL) is the excess of business deductions (computed with certain
modifications) over gross income in a particular tax year. The loss
can be deducted, through an NOL carryback or carryover, in another
tax year in which gross income exceeds business deductions. In general,
NOLs may be carried back two years and forward 20 years. The NOL
is first carried to the earliest tax year for which it's allowable
as a carryback or a carryover, and is then carried to the next earliest
tax year. A business may forego the entire carryback period and
instead carry the NOL forward. For NOLs arising in a tax year beginning
or ending in 2008, eligible small businesses (ESBs) could elect
to increase the NOL carryback period from 2 years to 3, 4, or 5
years. A calendar year business could only make the election for
2008. A fiscal-year taxpayer whose year ended in 2008 could make
the election either for (a) its fiscal year ending in 2008 or (b)
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) whose average
annual gross receipts are $15 million or less for the three-tax-year
period (or shorter period of existence) ending with the tax year
in which the loss arose.
New law allows longer carryback period for most businesses.
The Act generally permits any business (not just an
ESB) to increase the carryback period for an applicable NOL to 3,
4, or 5 years from 2 years (however, businesses getting certain
federal bailout funds are not eligible). An applicable NOL is a
business's NOL for any tax year ending after Dec. 31, 2007, and
beginning before Jan. 1, 2010. Generally, an election may be made
for only one tax year. However, an ESB that made or makes an election
under the rules in effect before Nov. 6, 2009 (the Act's enactment
date) may make an election for 2 tax years instead of just 1. The
amount of the NOL that can be carried back to the 5th tax year before
the loss year can't be more than 50% of a business's taxable income
for that 5th preceding tax year determined without taking into account
any NOL for the loss year or for any tax year after the loss year.
The amount of the NOL otherwise carried to tax years after the 5th
preceding tax year is adjusted to take into account that the NOL
could offset only 50% of the taxable income for that 5th preceding
tax year. For example, assume Ace Corp (not an ESB) has an NOL of
$5 million for its tax year ending Aug. 31, 2009. In its tax year
ending Aug. 31, 2004, it had taxable income of $6 million. If Ace
elects to carry back its NOL to the 2004 tax year, then it may apply
only $3 million of that loss against its taxable income for 2004.
In determining the amount of the NOL that ACE can carry over to
years ending after Aug. 31, 2004, the NOL is reduced by only the
$3 million that was offset for the 2004 tax year. However, note
that the 50% limitation does not apply to the applicable 2008 NOL
of an ESB that makes an election under pre-Act law, even if the
election is made after Nov. 6, 2009. Note that the Act carries a
separate, similar set of NOL carryback rules for life insurance
companies.
NOL transition rules to watch out for.
The Act's transition rules allow a business to revoke any election
to waive the carryback period for an applicable NOL or an applicable
loss from operations for a tax year ending before Nov. 6, 2009.
The election can be revoked by the extended due date for filing
the tax return for the business's last tax year beginning in 2009.
Similarly, any application for a tentative carryback adjustment
to gain an immediate refund for such a loss is treated as timely
filed if filed by the extended due date for filing the tax return
for the business's last tax year beginning in 2009. Normally, an
election to waive the carryback period cannot be revoked. The transition
rules afford an opportunity to undo a waiver for an applicable NOL,
or an applicable loss from operations for a tax year ending before
Nov. 6, 2009.
Scheduled drop in FUTA tax rate is deferred.
Before the Act, the FUTA rate was scheduled to drop from 6.2% to
6% after 2009. Under the Act, the 6.2% FUTA tax rate continues to
apply through June of 2011, and afterwards a 6.0% rate will apply.
Estimated tax change. For large corporations
(those with $1 billion or more in assets), the required payment
of estimated tax otherwise due in July, August, or September of
2014 under pre-Act law will be increased by 33%. The amount of the
next required installment will be appropriately reduced to reflect
the amount of the increase in the earlier installment.
Passthrough penalties increased. The base
amount on which a penalty is computed for a failure to file either
a partnership or S corporation return for a tax year beginning after
Dec. 31, 2009, is increased to $195 per partner or shareholder.
Please do not hesitate to call us to discuss how your business is
affected by the Act's changes, particularly its more-generous, but
complex, NOL changes.
To comply with the requirements of IRS Circular 230, we must inform
you that the information discussed above is not intended or written
to be used, and cannot be used by the recipient or any other taxpayer,
for the purpose of avoiding penalties that may be imposed under
the Internal Revenue Code or any other applicable tax law, or to
promote, market or recommend to another party any transaction, entity,
investment plan, arrangement or other matter.
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