Normally, when you have a loss (called a Net Operating Loss or NOL for short) in one year of operations, you can carry it back two years to obtain refunds against tax paid in those prior years. Long story short, there is a temporary opportunity for businesses to carry back 2009 NOLs for up to five years.
Sounds great? Well, there's a catch. (Surprised?) If a business taxpayer makes the election to carry back an NOL to the fifth preceding year, the NOL carryback is limited to 50 percent of the taxable income in the fifth preceding year. The remaining NOL balance can be carried forward to the fourth preceding year, and so on until the loss is used or expired.
To take advantage of this, the taxpayer must make the election by the extended due date for filing the current year return. BONUS: For small business taxpayers with gross receipts averaging $15 million or less over a three year period, who elected to carry back a 2008 NOL, they can elect to carry back a 2009 NOL up to five years as well.
So, let's go over how this works. Let's say you have a personal service business, ABC, Inc. In 2009, you had an NOL of $75,000. In the fifth preceding tax year (2004), you had taxable income of $140,000. Applying the limitation rule, 50 percent of $140,000 is $70,000. Since $70,000 is the most you can apply from your 2009 NOL, you get a refund of $21,000 (30 percent tax rate times $70,000).
Then, you look at the fourth preceding tax year (2005) and find that you had taxable income of $125,000. Applying your remaining NOL of $5,000 ($75,000 minus $70,000), you get a refund from 2005 of $1,500 ($5,000 times 30 percent Tax Rate).
End result, your business lost $75,000 this year, Ouch! But, with a little wrangling, you can get the IRS to give back $22,500 of prior year taxes paid, making your net cash loss much less painful. Feeling better yet?
The important thing to remember is that, for corporations, LLCs, etc., the filing deadline to take advantage of this special NOL five-year carryback, is Sept. 15.
There are a few additional twists in this NOL carryback process. When you carryback an NOL, you might trigger losing a tax credit for that year that may not carry forward. One such credit is the Domestic Production Activities Deduction. (Affectionately known as "section 199".) Now this could be the subject of a whole new column. As a matter of fact, that's a great idea. Stay tuned to my next column to discover how you might be missing a really great "gift" (section 199) from Congress that could go away at any time.
• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.