Net Operating Loss Carryback Option Extended

Net Operating Loss Carryback Option Extended
Under a revenue procedure recently issued by the IRS, many businesses can use losses incurred during the economic downturn of 2008-09 to reduce income from prior tax years. The provision allows businesses to elect to carryback a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (it had previously been limited to an end date of January 2009).

A net operating loss typically occurs during a period in which a company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income, which generally happens when a company has incurred more expenses than revenues during the period. The NOL carryback procedure can be used to recover past tax payments or reduce future tax payments.

An NOL or loss from operations carried back five years may offset no more than 50% of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year. The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs from similar relief issued earlier this year in that the previous relief was limited to small businesses. The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program.