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Loss Carryback Rules Leading to Refunds

February 16, 2010 · 1 comment

This time of year, most of the focus in the media tends to be on negativity – taxes gone bad, driving folks out of business and others to distraction. That’s why it was heartening to see this story on CNN about a taxpayer who caught a break with the new tax laws.

As previously blogged, the Worker, Homeownership and Business Assistance Act of 2009 expanded the net operating loss (NOL) provisions of the American Recovery and Reinvestment Act (ARRA). The bill, which was tacked onto the homebuyer’s credit extension/expansion in November, would allow businesses which suffered losses in 2008 or 2009 to retroactively apply those losses to any five years prior to 2008. The expansion applies to all companies except those that took money as part of TARP. A similar rule, known as a “net-operating loss carryback” or “NOL carryback”, had been in place before but only allowed losses to be carried back for two years.

The key is that you have to have some kind of profit to attach to the losses. To the extent that you were not profitable over the past five years, there’s no benefit to amending your returns to take advantage of the NOLs. But if you were paying Uncle Sam over the past five years – and then suffered a loss in 2008 or 2009 – you can recover some of the tax you paid previously.

The CNN story singles out Bill Hewitt, who recently collected a $150,000 refund check from the IRS thanks to the new tax rules. Hewitt’s business (in the real estate industry) had been profitable until this year. He was forced to scale down from 50 employees to 30; he was unable to get additional financing for his business through banks (you know, the ones that are supposed to be lending to small businesses with our money as part of TARP). All of this, despite the fact that he had once been profitable.

But the NOL gave Hewitt some relief. He now has cash to continue to manage his business until, hopefully, things get better. And that’s exactly the point of the provision: to help previously profitable companies regain their footing.

The NOL isn’t restricted to real estate companies. It’s available to all companies, including partnerships, sole proprietorships and s corporations, which have previously reported profits and paid tax on those amounts. If those taxpayers experience a loss in 2008 or 2009, they may be able to recover some of those losses.

If you think that this might apply to you and your company, don’t try to work it out yourself. Consult with your tax professional – the potential savings are worth it. And the tax advice is deductible to you anyway.

And I know what the rest of you are thinking: what does this cost taxpayers? About $10 billion over the next ten years. If that seems like a lot, consider this fact: the expansion of the homeowner’s credit, which was part of the same bill, costs taxpayers the same amount – in just a mere ten months.

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