Tip: New tax break option for business losses

The Worker, Homeownership and Business Assistance Act, signed into law in early November 2009, gives a valuable tax break to businesses that have incurred net operating losses in 2009. Under the general rule, a business owner is permitted to carry back a NOL for two years and deduct it against taxable income for those two years. The new November 2009 provision extends the time period and allows business owners to  carry back a NOL for three, four and even five years. Given the current credit crunch and the tough economic climate, this new provision creates a valuable tax break for many business owners.

The November law (which is not restricted to small business only) can be layered on top of the February Stimulus Act tax break, which allowed owners of small businesses to  carry back their net operating loss for 2008 for three, four or five years (instead of the two-year time frame previously allowed). Unlike the recent November measures, the Stimulus Act benefited only smaller businesses with gross annual receipts of $15 million or less. The act allowed a business owner to carry back a 2008 NOL as many as five years to recover some of the federal income taxes paid in the 2003 filing. If the business owner still had a portion of the NOL remaining, it could be applied against 2004, 2005 and so on until the NOL was used. If after these five-year carry backs a business owner had still more 2008 NOL, it could be carried forward for 20 years.

The new November legislation has done away with the $15 million average annual gross receipts cap, and in doing so offers larger enterprises the option of extended NOL carry backs.

If you were one of the smaller businesses that qualified and took advantage of the February Stimulus Act to carry back a 2008 NOL more than two years, you might still be able to take advantage of the new measures. The legislation permits small businesses in this category to do the same thing again for a 2009 NOL. However, if a business owner has already taken advantage of the extended carry back provisions for a 2008 NOL, any 2009 NOL carried back to the fifth preceding year can only be used to offset 50 percent of that year's income.

The option of an additional NOL tax offset can create some confusing options for small business owners. Whether you took advantage of the Stimulus Act earlier or you are considering extended carry backs for a 2009 NOL for the first time, it is important to discuss your specific situation with your tax professional. You could wait until the due date of your 2009 tax return to make a decision; however, deciding now allow you to plan the most advantageous tax strategy as well as a capital spending plan for 2009 and subsequent years. Prompt action and a consultation with your tax professional before the holidays make good sense.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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