Five-Year NOL Carryback Extended
 
Written by: Steven D. Beaucaire, MST, CCSP
Director - Tax | Bedford Cost Segregation, LLC


NOL Overview
 
A net operating loss (NOL) is the excess of business deductions (with some modifications) over gross income in a particular tax year. In general, a NOL can be carried back two years and forward 20 years and used against income generated in those years. The NOL is first carried back to the earliest tax year for which it's allowable and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period and carry the NOL forward. For purposes of the alternative minimum tax (AMT), a taxpayer's NOL cannot reduce the taxpayer's alternative minimum taxable income (AMTI) by more than 90% of the AMTI. This is often referred to as a 10% haircut.

Recent Developments (Earlier this year)
 
In February, the American Recovery and Reinvestment Act of 2009 provided taxpayers the ability to carryback NOLs generated in 2008 (for tax years beginning or ending in 2008). Under this Act eligible small businesses could elect to increase the carryback period for applicable 2008 NOLs from two years to three, four, or five years. Eligible small businesses include any trade or business conducted in or through a corporation, partnership, or sole proprietorship, whose average annual gross receipts for the three-tax-year period (and ending with the tax year in which the loss arose) are $15 million or less, and qualifies for the extended NOL treatment.

While the intent of this temporary incentive was good for small business, the timing of the provision did not enable many taxpayers to take full advantage of it due to the small window of opportunity. Further, because of the average revenue limitation, many businesses did not qualify.

New Law – Worker, Homeownership and Business Assistance Act of 2009
 
The Worker, Homeownership and Business Assistance Act of 2009, signed by President Obama on November 6th provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to three, four, or five years from two years.

An applicable NOL means the taxpayer'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 eligible small business that made or makes an election under the Code as in effect before Nov. 6, 2009 (the enactment date) may make an election for two tax years instead of just one.

The amount of the NOL that can be carried back to the fifth tax year before the loss year may not be more than 50% of the taxpayer's taxable income for that fifth preceding tax year, determined without taking into account any NOL for the loss year or for any tax year after the loss year. This restriction does not apply to a small business as defined in the current law. However, the amount of the NOL otherwise carried to tax years earlier than this year is adjusted to take into account this adjustment. In other words you do not lose anything in the adjustment above. An example below illustrates the application of this new law as follows:

• A taxpayer (not a small business), has a NOL of $20 million for the tax year ending December 31, 2009

• Tax year ending December 31, 2004 it had $12 million in income (five years back)

• The taxpayer can only apply $6 million of the 2009 NOL to the 2004 tax year ($12,000,000 X 50%= $6,000,000)

• The remaining $14 million of the NOL can be carried to the fourth earliest tax year

The 50% limitation does not apply to the applicable 2008 NOL of an eligible small business with respect to which an election is made under pre-Act law even if the election is made after Nov. 6, 2009.

More good news is that for tax years ending after 2002, the Act suspends the 90% limitation on the use of AMT NOL attributable to the carryback of an applicable NOL for which the extended carryback period is elected. No more 10% haircut.

The taxpayer does not get to use the extended carryback period if:

1. the Federal government acquires an equity interest in that taxpayer using Troubled Asset Relief Program (TARP) funds,

2. the Federal government acquired before Nov. 6, 2009, any other right to acquire any equity interest with respect to the taxpayer under TARP,

3. the taxpayer receives after the date of this act (Nov. 6, 2009), TARP funds from the Federal government in exchange for an interest described above. Unless such taxpayer is a financial institution, and the funds are received from a program established by the Secretary of the Treasury to increase the availability of credit to small businesses using funding available under TARP.

The following table illustrates how beneficial this temporary strategy can be for taxpayers who are facing the challenges of today’s economy and how a cost segregation study can help. Let’s take a look at ABC Development’s revenue, profit and tax positions over the past five years. Note that ABC Development had a $1MM NOL to carryback as a result of a cost segregation study performed for 2009. The following table illustrates the application of this NOL carryback strategy and just how dramatic it can be.

*Assuming that this is not a small business, the carryback in year 5 is limited to 50% of income for that year.


As the above table illustrates, the value associated with the NOL, which was created by a properly conducted cost segregation study, will result in a $350,000 refund check. Talk about an economic incentive that worked.

To learn more about this application for cost segregation, or others, contact your Bedford representative today. Our team of highly trained engineers and tax professionals, which includes five Certified Cost Segregation Professionals (CCSPs) is here to help.


1 § 172(b)(1)(H)(i)(I) as amended by Act Section 13(a)
2 § 172(b)(1)(H)(i)(I) as amended by Act Section 13(a)
3 § 172(b)(1)(H)(iii)(I) as amended by Act Sec. 13(a)
4 § 172(b)(1)(H)(v)(I) as amended by Act Sec. 13(a)
5 § 172(b)(1)(H)(iv)(I) as amended by Act Sec. 13(a)
6 § 172(b)(1)(H)(iv)(II) as amended by Act Sec. 3(a)
7 § 56(d)(1)(A)(ii)(I) as amended by Act Sec. 13(b)