Expanded Tax Refunds From Carrying Back 2008 and 2009 NOLs May Be Available

On Friday, November 6, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009 (the “New Act”) into law.  The New Act adopts a number of changes, such as extending the $8,000 first-time homebuyer tax credit, providing additional unemployment compensation benefits, and imposing some additional taxes and fees to offset the revenue impact of the benefits provided by the New Act.

Critically, the New Act provides an expanded mechanism for taxpayers that generated net operating losses (“NOLs”) in 2008 and 2009 to carry back those losses to earlier years to obtain tax refunds.

Prior to 2009, taxpayers could carry back NOLs to the two prior tax years and then carry the NOLs forward for the next twenty years.  The American Recovery and Reinvestment Act of 2009 signed into law in February, 2009, allowed eligible small businesses to elect to carry back an “applicable 2008 net operating loss” for up to five years, rather than two years.  Eligible small businesses were defined to mean corporations or partnerships with average annual gross receipts for the prior 3-year period of less than $15,000,000.

The New Act expands ARRA’s NOL carryback provisions by allowing any taxpayer, not just eligible small businesses, to carry back NOLs generated in tax years beginning in either 2008 or 2009 to the prior five years. The New Act does not cap the amount that can be carried back against income of the first four prior years, but limits the amount that can be carried back to year five to 50% of the taxable income in that year. Finally, no taxpayer that received funds as a TARP recipient under the provisions of the Emergency Economic Stabilization Act of 2008 is eligible for this expanded NOL provision.

For calendar year filers, the loss generating the NOL will need to be incurred by December 31, 2009, to qualify for the five-year carryback period.  Businesses that are selling underperforming or distressed assets at a loss may want to determine whether closing the transaction prior to the end of this tax year would generate a substantial tax refund.  The New Act’s provision will be more interesting to C corporations that will be directly entitled to the refunds, rather than to pass-through entities.  Closely-held partnerships and S corporations may be interested to the extent that they know that their partners or shareholders, respectively, could use losses that pass through to them as NOLs that could be carried back on the partners’ or shareholders’ returns and generate tax refunds for the partners and shareholders.  Obviously, all such losses need to be ordinary losses that generate net operating losses rather than capital losses.