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The American Recovery and Reinvestment Act of 2009 changed the tax code to increase the period of time over which small businesses may offset 2008 losses with prior year tax refunds. To maximize benefit from the new rules, care should be taken in choosing how to use the carry-back provisions and selecting the period over which to offset 2008 losses.
As explained by AICPA's Tax Insider, under the old rule (IRS Sec. 172), businesses could "carry-back" net operating losses (NOLs) in a given tax year over a period of two years or carry them forward 20 years. This means taking the net operating losses and applying them against taxable income from prior years or against future taxable income. If carried back over prior years, the business would get a refund corresponding to taxes previously paid on now reduced prior year income.
Under the new rule, eligible small businesses can carry-back NOLs against a period of 2, 3, 4 or 5 years going back to 2003. To qualify, a small business must have an average gross income of less than $15 million over the past three years. Sole proprietorships, partnerships and corporations are eligible, but related businesses must be aggregated.
On this year's return, businesses must make an irrevocable election of how they will carry back or carry forward 2008 NOLs. Those who have already filed may still make use of the extended carry back years, but must elect to do so by the later of April 17 or six months after the due date of the return (without extensions).
Here are some tips for making effective use of the extended carry-back years.
1. Consult with a local CPA who can help guide the best offset of 2008 NOLs and ensure compliance with your state's tax code.
2. If you are a fiscal year filer whose fiscal year ended before 12/31/2009, take care in choosing which year's NOLs you will carry back. You can choose either the fiscal year ending in 2008 or the fiscal year ending in 2009, but the choice is irrevocable once made.
3. The most important decision will be which years to carry back against. You can choose any 2, 3, 4 or 5 year period going back to 2003, so calculate which combination would yield the largest refund. Keep in mind to apply as much of the NOLs as possible to years with higher marginal tax rates, rather than years with lower taxes paid.
4. Instead of filing an amended return for the prior years you will offset against (which was normally required to get the refund), accelerate processing of your refund by using Form 1045 (if your business is a sole proprietorship, partnership or S corporation) or Form 1139 (if your business is a corporation).