Friday, March 20, 2009

s C03-32-2009 - Net Operating Losarryback Guidance Provided for Eligible Small Businesses

The IRS announced that small businesses with deductions exceeding their income in can use a new net operating loss (NOL) tax provision to get a refund of taxes paid in prior years. The IRS has updated the instructions for Form 1045, Application for Tentative Refund, and 1139, Corporation Application for Tentative Refund, so that eligible small businesses can make use of the special carryback provision under Code Sec. 172(b)(1)(H) for 2008. The new provision, enacted as part of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), 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. Some taxpayers must make the election to use this special carryback by April 17, 2009.

CCH Comment. With the economic downturn and the new law, the IRS expects record numbers of small businesses to be eligible for the refunds. The IRS is putting in special steps to ensure timely processing of these refunds to help small businesses during this period.


CCH Comment. The IRS has clarified that the $15 million in gross receipts test is to be applied over the three-year tax period ending with the tax year of the NOL. Although this is consistent with the CCH's interpretation of the rule in CCH'sAmerican Recovery and Reinvestment Act of 2009: Law, Explanation and Analysis, there was confusion regarding the application of the test, which is based on the gross receipts test in Code Sec. 448(c). In particular, some interpreted the test to be applied over the three-year tax period preceding the NOL year. Including the NOL year as one of the test years could allow more taxpayers to meet the requirements for the expanded NOL period because a loss year arguably means a taxpayer will have lower gross receipts for the year.

For small businesses that use a fiscal year, this special carryback may be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it may not be changed.
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. If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009. Form 1045 or Form 1139, whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. Further, the current year's tax return must be filed by the date the Form 1045 or Form 1139 is filed. Form 1045 and Form 1139 are filed at the same place the taxpayer's return is filed, as listed on the return instructions.

In addition, Frequently Asked Questions (FAQs) have been posted on the IRS.gov website. Small businesses that file Form 1040 can also call 1-800-829-1040 with NOL questions. Corporations can contact 1-800-829-4933 with NOL questions.

Rev. Proc. 2009-19, 2009FED ¶46,292

IR-2009-26,

2009FED ¶46,293

Other References
Code Sec. 172

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