When Losses Are a Good Thing

No business owner wants to lose money. But if this happens, there can be a silver lining—a tax break that enables the owner to recoup taxes paid in prior years. This is called a net operating loss (NOL) carryback, and Congress just made things better for owners with losses.

Under the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548 with S.A. 2712), which was passed by the Senate on November 4 and is expected to receive swift passage in the House and a presidential signature, small business owners with net operating losses in 2009 will be able to use a longer carryback period. This means potentially recouping more taxes and receiving an immediate infusion of cash that can be used now to keep the business going.

Who’s eligible?   The new rule applies only to “small businesses,” defined as businesses with average annual gross receipts of $15 million or less in the prior three years.

What’s the new carryback period?   Usually, the NOL carryback is limited to the two prior years. The American Recovery and Reinvestment Act of 2009 allowed eligible businesses to opt for a three-, four-, or five-year carryback for NOLs in tax years beginning or ending in 2008. The new bill allows up to a five-year carryback for NOLs arising in 2009.

Small businesses will be able to offset all income in the four previous carryback years and half of the income for the fifth carryback year. Generally, the longer carryback can only be used for one NOL year. Small businesses that already elected to use the five-year carry back for 2008 NOLs will be permitted to also carry back losses from 2009.

Caution: This measure will be partly paid for by increasing the late-filing penalties for partnerships and S corporations. The penalty for returns due after December 31, 2009, will rise from $89 to $195.

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