Tax Relief Passed for Businesses with Net Operating Losses

Qualifying Asset Sales Must Close by the End of a Pre-2010 Fiscal Year

Co-authored by Walt Turner

[Originally published as a Wendel Rosen Client Update, November 20, 2009.]

The Worker, Homeownership and Business Assistance Act of 2009 (H.R. 3548), signed by President Obama on November 6, 2009, has expanded federal tax benefits for businesses operating at a loss.

Highlights of the new law are:

• Businesses of all sizes can now carryback net operating losses (NOLs) for up to five (5) years (with a 50 percent income limit on 2009 NOL offsets in the fifth year).  Previously, the five-year carryback was limited to small businesses with revenue of $15 million or less.
• The new election is available for NOLs incurred in either 2008 or 2009, but not for both years.  However, an eligible business that previously had elected to carryback 2008 NOLs may make the election for an additional year, enabling it to carryback NOLs from both 2008 and 2009.  Previously, the carryback was only applicable to 2008 losses.

An important impact of the new law is that a business that carries back an NOL to a prior profitable year and consequently obtains a refund from the IRS, can then use this additional cash for pressing business needs such as paying current expenses, maintaining operations or making new investments.

Additionally, given this new law, now may be the time to analyze whether a distressed asset should be sold.  For a sales transaction to qualify for the tax break, it has to close by the end of the fiscal year of the company that commenced before January 1, 2010 (e.g., in the case of a calendar year taxpayer, by the end of calendar year 2009).