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Own a Small Business that’s Losing Money?
David A. Stiefel, MBA, CPA/PFS
Principal, Tax Services; Principal, Accounting and Assurance Services; Director, Family and Closely Held Business Services
March 9, 2009
It came as quite a shock. Max Russo's family-owned business lost money last year―for the first time in more than three generations. Although activity was noticeably down the last couple of years, the business had remained profitable.
This loss comes at a particularly difficult time for Max's business. The combination of economic downturn and credit/liquidity crisis has wiped out the company's cash reserves and significantly reduced its line of credit. Borrowing is becoming impossible, so simply making payroll and funding inventory each month are increasingly difficult.
To help provide additional working capital for businesses like Max's, a temporary provision of the American Recovery and Reinvestment Act of 2009 allows eligible small businesses to carry back net operating losses for longer periods of time.
Given the severity of the current recession, many more small businesses are experiencing losses in this business cycle than ever before. The federal tax code includes a provision to help by providing additional working capital to many such businesses. According to Congress, the tax code's net operating loss (NOL) rules were "designed to allow taxpayers to smooth out swings in business income (and Federal income taxes thereon) that result from business cycle fluctuations." For this purpose, NOL's are defined as the amount by which business deductions, including certain modifications, exceed business income.
To address the severity of current situation―given the magnitude of current losses and the accompanying crisis in the availability of credit―the American Recovery and Reinvestment Act of 2009 provides much-needed relief by temporarily expanding the current federal tax treatment for NOLs.
The new rules extend the length of the NOL carryback period for eligible small businesses, allowing them to use current losses to offset income from prior years. As the prior-year income has already been taxed, the carrybacks generate tax refunds―which the businesses can use to pay for capital investments or other expenses.
Treatment of NOLs Under Previous Law
Generally, you could carry your NOL back two years and then carry it forward for twenty years.
You could also elect to skip the entire carryback and simply carry the NOL forward.
Impact of the New Legislation
The new rules apply to NOLs for tax years ending in 2008 or, if the business so elects, tax years beginning in 2008. Under these new rules, eligible businesses can affirmatively elect to carry their NOLs back for three, four, or five years instead of the general two years―depending on which option provides the largest benefit given the unique circumstances of each business.
Eligible businesses may use an expedited procedure to get NOL-related tax refunds before the IRS actually processes the return for the year giving rise to the NOL. However, the tax return must be filed at the same time or before the quick-refund request is filed.
Businesses that carried back 2008 NOLs under the old two-year rules have until April 18, 2009 to revoke the two-year carryback election and replace it with an election for an extended carryback period.
Eligible small businesses are those with average annual gross receipts of $15 million or less for the prior three years. Businesses with average annual gross receipts in excess of $15 million are not eligible for the extended carryback provisions, although they can still carry back losses for two years.
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