IRS Q&As explain the new longer NOL carryback option for businesses
Questions and Answers for the Worker, Homeownership, and Business Assistance Act of 2009—5-year Net Operating Loss (NOL) Carryback


In recently revised Questions and Answers (Q&As) on its website, IRS has explained how businesses can elect the new optional longer net operating loss (NOL) carryback period that was provided by the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92 ).
Background. Under WHBAA, all taxpayers (except certain taxpayers getting help from the Federal government under the Emergency Economic Stabilization Act of 2008, i.e., TARP recipients) may elect to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. ( Code Sec. 172(b)(1)(H) , see Weekly Alert ¶ 9 11/19/2009 ) An applicable NOL means the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. ( Code Sec. 172(b)(1)(H)(ii) ) Generally, an election may be made for only one tax year. ( Code Sec. 172(b)(1)(H)(iii)(I) ) But “eligible small businesses” (ESBs, see below) that made or makes an election under the Code as in effect before Nov. 6, 2009 (WHBAA's enactment date) may make an election for 2 tax years instead of just 1. ( Code Sec. 172(b)(1)(H)(v)(I) )
The WHBAA Code Sec. 172(b)(1)(H) election is an expansion of the increased carryback period election provided by the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ), which was available only to ESBs, and only for 2008 NOLs. An ESB is a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) ) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation.
Under the WHBAA Code Sec. 172(b)(1)(H) election, the amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer's taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year. ( Code Sec. 172(b)(1)(H)(iv)(I) ) The 50% limitation does not apply to an ESB with respect to an election made under pre-WHBAA law. ( Code Sec. 172(b)(1)(H)(iv)(III) )
Under transition rules, a taxpayer may revoke any election to waive the carryback period under either Code Sec. 172(b)(3) with respect to an applicable NOL or an applicable loss from operations for a tax year ending before Nov. 6, 2009, by the extended due date for filing the tax return for the taxpayer's last tax year beginning in 2009. Similarly, any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed by the extended due date for filing the tax return for the taxpayer's last tax year beginning in 2009. (WHBAA Sec. 13(e)(4))
The extended carryback election under WHBAA must be made in the manner IRS determines, and must be made by the due date (including extensions) for filing the taxpayer's last tax return for a tax year beginning in 2009. Once made, the extended carryback election is irrevocable. ( Code Sec. 172(b)(1)(H)(iii)(II) ) In Rev Proc 2009-52, 2009-49 IRB 744 , IRS set out how businesses can elect the optional longer NOL carryback period (see Weekly Alert ¶ 11 11/25/2009 ) Subsequent to that notice, IRS has supplied additional information on its website.
NOL Q&As. On its web site, IRS explains that a taxpayer can make the NOL election using either of two methods: (1) by attaching an election statement to the federal income tax return or amended return for the tax year in which the loss is incurred; or (2) by attaching an election statement to the carryback form itself (Form 1045, 1139, 1040X, 1120X or amended 1041 or 990-T). (Q&A No. 3)
A copy of the election statement must be included with the carryback form. (Q&A No. 4) In the election statement, a taxpayer must state: (1) that it is electing to apply Code Sec. 172(b)(1)(H) under Rev Proc 2009-52 ; (2) that it isn't a TARP recipient or, during 2008 or 2009, an affiliate of a TARP recipient; and (3) the length of the carryback period being elected (3, 4, or 5 years). (Q&A No. 5) If the election statement is faulty or not attached to the carryback form, IRS will not process the carryback. The taxpayer will receive a letter asking it to resubmit the carryback. (Q&A No. 6)
The WHBAA NOL election must be made by the due date (including extensions) for filing the tax return for a taxpayer's last tax year beginning in 2009. This is true whether the election is for losses incurred in 2008 or 2009. If a taxpayer files its 2009 tax return on time without making the election, it has an additional six months from the normal due date of the 2009 tax return to make the election. For example, an individual who files a calendar 2009 tax return by Apr. 15, 2010, without making the election has until Oct. 15, 2010, to make the election for either 2008 or 2009 losses. (Q&A No. 7)
A taxpayer that already filed a 2-year carryback for NOLs in 2008 can make the WHBAA election by either (1) filing an amended return for 2008 to make the election (attach the election statement to the amended return); or (2) simply filing an amended carryback for 2008 using the appropriate carryback form (1045, 1139, 1040X, 1120X or amended 1041 or 990-T). The taxpayer must include the election statement with the carryback form, and the taxpayer must state that it is amending a previous carryback. (Q&A No. 7)
IRS confirms that a taxpayer has more time to file a tentative carryback application (Form 1045) for 2008 losses if a WHBAA election is made. WHBAA provides an extension of the normal period for filing a tentative carryback application, using Form 1045 or 1139. Normally, the deadline for filing a 2008 tentative carryback for a calendar year taxpayer is Dec. 31, 2009 (12 months after the end of the tax year in which the loss is incurred). But WHBAA allows a taxpayer to make the 2008 election and file a tentative carryback application by the due date (including extensions) of the 2009 federal income tax return. Instead of a Dec. 31, 2009 deadline for filing Form 1045, the WHBAA deadline is Apr. 15, 2010 (or up to Oct. 15, 2010, if an extension is filed). (Q&A No. 13)
Where a taxpayer previously made an irrevocable election to waive the carryback period for 2008 losses, IRS says it can revoke that election in order to take advantage of WHBAA. Taxpayers who previously elected to waive the carryback period for an applicable NOL in a tax year ending before Nov. 6, 2009, may revoke that election and make the WHBAA election. They should either (1) file an amended return for the NOL tax year (attaching the election statement to the amended return) or (2) simply file a carryback for the NOL tax year using the appropriate carryback form (1045, 1139, 1040X, 1120X or amended 1041 or 990-T). The taxpayer must include the election statement with the carryback form and must state that it is revoking an NOL (or loss from operations) carryback waiver. The revocation of the previous waiver and election must be made by the due date (including extensions) for filing the tax return for the taxpayer's last tax year beginning in 2009. (Q&A No. 12)
IRS noted that if a taxpayer elects a 5-year carryback, the alternative minimum tax net operating loss deduction (AMT NOLD) in the fifth preceding year is limited to 50% of the taxpayer's previously-determined alternative minimum taxable income (AMTI) in that year. For this purpose previously-determined AMTI means AMTI for the carryback year determined without reduction for the AMT NOLD attributable to the loss year or any later tax year.
IRS also addressed the situation of a taxpayer who wanted to take advantage of WHBAA and file a tentative carry back application for his corporation's losses in 2009, but wasn't prepared to file the 2009 tax return yet and had requested an extension to file Form 1120 until Sept. 15, 2010. IRS cautioned that the taxpayer couldn't file Form 1139 now to get refunds and then file the 2009 Form 1120 on Sept. 15. Code Sec. 6411(a) requires that the tax return generating the NOL, net capital loss, or unused business credit must be filed on or before the date a tentative carryback application is filed. IRS will not process a tentative carry back application if the tax return generating the loss has not been filed. (Q&A No. 16)