Under the Worker, Homeownership, and Business Assistance Act of 2009, signed into law by President Obama on November 6, 2009, taxpayers may elect to carry back net operating losses arising in a 2008 or 2009 tax year for up to 5 years. A similar election was created for certain small business taxpayers as part of the Emergency Economic Stabilization Act of 2008 (“EESA”) but was only available to taxpayers with gross receipts averaging $15 million or less over a 3-year period. Prior to the new legislation, net operating losses generally could be carried back only 2 years.
The new legislation applies to net operating losses of a taxpayer for any taxable year ending after December 31, 2007, and beginning before January 1, 2010. The carryback election, however, may be made only with respect to one taxable year within such period. An eligible small business that previously made a carryback election under EESA may also make a carryback election under the new legislation. As a result, an eligible small business taxpayer may have a carryback election with respect to two separate taxable years, due to the overlap between EESA and the new legislation.
A taxpayer that makes an election under the new legislation may extend the net operating loss carryback period to 3, 4 or 5 years. If the taxpayer elects a 5-year carryback period, however, the net operating loss carryback deduction for the 5th taxable year preceding the taxable year of the loss will be limited to 50% of the taxpayer’s taxable income for such preceding year. This limitation does not apply to net operating losses carried back to the 4th preceding or earlier taxable years.
A taxpayer that makes a carryback election under the new legislation generally will be able to apply the net operating loss carryback deductions against the taxpayer’s entire regular taxable income and alternative minimum taxable income for each year in the carryback period (other than the 5th preceding taxable year), limited only by the amount of the net operating loss that is carried back to such year. The alternative minimum tax restriction that normally limits a net operating loss carryback deduction to 90% of a taxpayer’s alternative minimum taxable income in each carryback year is eliminated for net operating losses with respect to which a taxpayer makes a carryback election under the new legislation.
Notably, the new legislation does not apply to certain TARP recipients, including any taxpayer, or member of its affiliated group, if the federal government acquired an equity interest or warrant to acquire any equity interest in the taxpayer (or affiliate) pursuant to EESA prior to November 6, 2009, and under certain circumstances, after November 6, 2009. In addition, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and members of their affiliated groups, may not make a carryback election under the new legislation.
The new legislation directs the Secretary of the Treasury to prescribe rules to prevent an abuse of the purposes of the new legislation, including anti-stuffing rules, anti-churning rules (including rules relating to sale-leasebacks), and rules similar to the wash sale rules.
A carryback election under the new legislation must be made by the due date (including extensions of time) for filing a federal income tax return for the taxpayer’s last taxable year beginning in 2009. Once made, the carryback election is irrevocable. The new legislation states that the procedure for making a carryback election is to be prescribed by the Secretary of the Treasury. Although election procedures have not been issued to date, the government reportedly has begun working on guidance in this area.