Section 172(a) allows a taxpayer to claim a deduction in an amount equal to the aggregate of the NOL carryovers and carrybacks to the taxable year. Section 172(b)(1)(A)(i) provides that an NOL for any taxable year generally must be carried back to each of the 2 years preceding the taxable year of the NOL. Section 172(b)(3) provides that any taxpayer entitled to a carryback period under § 172(b)(1) may make an irrevocable election to relinquish the carryback period for an NOL for any taxable year.
Under the alternative minimum tax, adjustments are required to be made to taxable income under §56 in computing alternative minimum taxable income (AMTI). In the NOL area, §56(a)(4) provides that the alternative tax net operating loss (ATNOL) deduction applies in lieu of §172’s NOL deduction in computing AMTI. Section 56(d)(1) provides certain adjustments and limitations used in determining the ATNOL deduction for the taxable year. Under § 56(d)(1)(A)(i), the ATNOL deduction generally cannot exceed 90% of AMTI, determined without regard to the ATNOL deduction and the deduction under § 199 (deduction with respect to manufacturing expense attributable to U.S. production activities).
Worker, Homeownership, and Business Assistance Act of 2009
Section 13 of the Worker, Homeownership, and Business Assistance Act of 2009 (“WHBAA”), P.L. 111-92 (Nov.6, 2009) amends §§ 172(b)(1)(H) and 810(b)(losses from operations of a life insurance company) permitting taxpayers to elect to carry back an applicable net operating loss (NOL) for 3, 4, or 5 years, or a loss from operations for 4 or 5 years, in claiming overpayments in tax in one or each of such preceding taxable years. The IRS, in providing guidance in this area, just released Notice 2010-58, 2010-37 IRB, 08/20/2010 to offset taxable income in those preceding taxable years.
This entry will not address the impact of §13 of WHBAA on life insurance companies.
American Recovery and Reinvestment Act of 2009
Section 1211 of the American Recovery and Reinvestment Tax Act of 2009, P.L. 111-5(2/17, 2009) (ARRA), amended § 172(b)(1)(H) to allow an eligible small business (ESB) to elect to carry back a 2008 applicable NOL for a period of 3, 4, or 5 years (ARRA election)(emphasis added). Unlike the § 172(b)(1)(H) election under the WHBAA (WHBAA election), the ARRA election is applicable only to an NOL attributable to an ESB. The ARRA election is irrevocable and may be made for only one taxable year. Rev. Proc. 2009-26, 2009-19 I.R.B. 935 (April 25, 2009), modifying and superseding Rev. Proc. 2009-19, 2009-14 I.R.B. 747 (March 16, 2009), advises taxpayers how to make the ARRA election. In contrast the election under §172(b)(1)(H)(i), as amended by WHBAA, i.e., the 3, 4 or 5 preceding taxable year rule, is not limited to ESBs. Under the WHBAA, the term “applicable net operating loss” is with respect to a taxpayer’s NOL for a taxable year ending after December 31, 2007 and beginning before January 1, 2010.
Revised Section 172(b)(1)(H)
Section 172(b)(1)(H)(iii) provides that the election under § 172(b)(1)(H) is to be filed by the due date (including extensions) for filing the return for the taxpayer’s last taxable year beginning in 2009. The election is irrevocable and, in general, may be made for only one taxable year. However, §172(b)(1)(H)(v) allows a taxpayer that made or makes an ARRA election also to make a WHBAA election.
Section 172(b)(1)(H)(iv) limits the amount of an applicable NOL that a taxpayer elects under § 172(b)(1)(H)(i) to carry back to the 5th taxable year preceding the taxable year of the loss but subject to a limitation that the amount of the reduction to taxable income can not exceed 50% of the taxpayer's taxable income for such 5th preceding taxable year. The taxable income for the 5th preceding taxable year is computed without regard to the NOL for the loss year or any taxable year thereafter. The excess amount (for the 5th year rule) may be carried to later taxable years. For the carryback of an ATNOL to the 5th preceding taxable year, the 50% limitation is applied separately based on the AMTI. The limitation on the amount of an applicable NOL that may be carried back to the 5th preceding taxable year does not apply to an NOL carryback under the ARRA election.
Section 13(b) of the WHBAA amends § 56(d)(1)(A)(ii) to remove the 90% limitation in computing ATNOL attributable to an applicable NOL for which a taxpayer made an election under § 172(b)(1)(H).
Section 13(e)(4) of the WHBAA provides that a taxpayer who elects under § 172(b)(3) to forgo a carryback for a loss for a taxable year ending before the date of enactment of the WHBAA (11/6/2009) may revoke that election before the due date (including extensions) for filing the return for the taxpayer's last taxable year beginning in 2009. An application under § 6411(a) for the applicable NOL is treated as timely if filed before that due date.
Section 13(f) of the WHBAA provides that the election under § 172(b)(1)(H) is not available to certain taxpayers that receive benefits under the Emergency Economic Stabilization Act of 2008, Title I of Div. A of P.L. 110-343, and certain affiliates of these taxpayers.
Notice 2010-58, supra, adopts a question and answer format which should facilitate a more complete understanding of the new labyrinth of rules to wade through in a timely manner.