Tax Changes for Businesses in the ''Worker, Homeownership, and
Business Assistance Act of 2009'' (11/19/2009)
Dear Clients & Friends:
The Worker, Homeownership, and Business Assistance Act of 2009 (the Act), which
was signed into law on Nov. 6, 2009, makes it easier for most businesses to get
immediate tax savings from net operating losses (NOLs). It does so by allowing
certain NOLs to be carried back to earlier, more profitable years. In these
tough economic times, that's good news for businesses who have suffered losses
recently after better years when high taxes were paid. On the negative side, the
Act defers a scheduled drop in the FUTA (Federal Unemployment Tax Act (FUTA) tax
rate, increases penalties for certain businesses that fail to meet return filing
requirements, and boosts estimated taxes for large corporations in 2014.
Background on NOLs. A net
operating loss (NOL) is the excess of business deductions (computed with certain
modifications) over gross income in a particular tax year. The loss can be
deducted, through an NOL carryback or carryover, in another tax year in which
gross income exceeds business deductions. In general, NOLs may be carried back
two years and forward 20 years. The NOL is first carried to the earliest tax
year for which it's allowable as a carryback or a carryover, and is then carried
to the next earliest tax year. A business may forego the entire carryback period
and instead carry the NOL forward.
For NOLs arising in a tax year beginning or ending in 2008, eligible small
businesses (ESBs) could elect to increase the NOL carryback period from 2 years
to 3, 4, or 5 years. A calendar year business could only make the election for
2008. A fiscal-year taxpayer whose year ended in 2008 could make the election
either for (a) its fiscal year ending in 2008 or (b) its fiscal year beginning
in 2008 and ending in 2009, but not both. An ESB is a trade or business
(including one conducted in or through a corporation, partnership, or sole
proprietorship) whose average annual gross receipts are $15 million or less for
the three-tax-year period (or shorter period of existence) ending with the tax
year in which the loss arose.
New law allows longer carryback period for most businesses.
The Act generally permits any business (not just an ESB) to increase the
carryback period for an applicable NOL to 3, 4, or 5 years from 2 years
(however, businesses getting certain federal bailout funds are not eligible). An
applicable NOL is a business's NOL for any tax year ending after Dec. 31, 2007,
and beginning before Jan. 1, 2010. Generally, an election may be made for only
one tax year. However, an ESB that made or makes an election under the rules in
effect before Nov. 6, 2009 (the Act's enactment date) may make an election for 2
tax years instead of just 1.
The amount of the NOL that can be carried back to the 5th tax year before the
loss year can't be more than 50% of a business'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. The amount of the NOL otherwise
carried to tax years after the 5th preceding tax year is adjusted to take into
account that the NOL could offset only 50% of the taxable income for that 5th
preceding tax year.
For example, assume Ace Corp (not an ESB) has an NOL of $5 million for its tax
year ending Aug. 31, 2009. In its tax year ending Aug. 31, 2004, it had taxable
income of $6 million. If Ace elects to carry back its NOL to the 2004 tax year,
then it may apply only $3 million of that loss against its taxable income for
2004. In determining the amount of the NOL that ACE can carry over to years
ending after Aug. 31, 2004, the NOL is reduced by only the $3 million that was
offset for the 2004 tax year.
However, note that the 50% limitation does not apply to the applicable 2008 NOL
of an ESB that makes an election under pre-Act law, even if the election is made
after Nov. 6, 2009.
Note that the Act carries a separate, similar set of NOL carryback rules for
life insurance companies.
NOL transition rules to watch out for.
The Act's transition rules allow a business to revoke any election to waive the
carryback period for an applicable NOL or an applicable loss from operations for
a tax year ending before Nov. 6, 2009. The election can be revoked by the
extended due date for filing the tax return for the business's last tax year
beginning in 2009. Similarly, any application for a tentative carryback
adjustment to gain an immediate refund for such a loss is treated as timely
filed if filed by the extended due date for filing the tax return for the
business's last tax year beginning in 2009. Normally, an election to waive the
carryback period cannot be revoked. The transition rules afford an opportunity
to undo a waiver for an applicable NOL, or an applicable loss from operations
for a tax year ending before Nov. 6, 2009.
Scheduled drop in FUTA tax rate is deferred.
Before the Act, the FUTA rate was scheduled to drop from 6.2% to 6% after 2009.
Under the Act, the 6.2% FUTA tax rate continues to apply through June of 2011,
and afterwards a 6.0% rate will apply.
Estimated tax change. For large
corporations (those with $1 billion or more in assets), the required payment of
estimated tax otherwise due in July, August, or September of 2014 under pre-Act
law will be increased by 33%. The amount of the next required installment will
be appropriately reduced to reflect the amount of the increase in the earlier
Passthrough penalties increased. The
base amount on which a penalty is computed for a failure to file either a
partnership or S corporation return for a tax year beginning after Dec. 31,
2009, is increased to $195 per partner or shareholder.
Please give us a call and we'll set up a meeting to discuss how your business is
affected by the Act's changes, particularly its more-generous, but complex, NOL
Please call us at (510) 797-8661 if
you have any questions or comments.