Weak business conditions and a tight credit market have left many business taxpayers cash strapped. And many of those taxpayers have incurred business operating losses.
However, last November’s changes to the Internal Revenue Code relating to the tax benefits of such losses will result in significant dollars being put back into the hands of many taxpayers. The Worker, Homeownership and Business Assistance Act of 2009 is expected to benefit businesses by more than $33 billion in 2010, says Steven Y. Patler, JD, CPA, and a senior manager at Cendrowski Selecky PC.
“Companies that avail themselves of these changes in the law and that mine the existing provisions of the Internal Revenue Code may now be able to survive the rocky economy unscathed,” Patler says.
Smart Business spoke with Patler about how taxpayers can best position themselves for obtaining tax refunds from the government this year.
How do the new loss rules work?
If taxpayers had business operating losses in 2008 and/or 2009, they may have the opportunity to carry some or all of their losses back for up to five years to offset taxable income. Consequently, all or a part of the taxes paid during those prior five years may be refunded to the taxpayer.
Taxpayers have the ability to choose a carryback period of between two and five years. This is a change from prior law in which taxpayers were generally limited to carrying such losses back only two years. If a taxpayer elects to go back five years, there are additional income limitations that may apply in the fifth year.
Although there are no restrictions as to the size of a business eligible to take these losses, a taxpayer may only make the election to carry back losses beyond two years once, either in 2008 or 2009, unless the business meets the requirements of an eligible small business ($15 million or less in gross receipts). So it may be possible for an eligible small business to carry losses incurred in both 2008 and 2009 back five years.
The new rules apply to corporations as well as to individuals who may have net operating losses through self-employment or through a pass-through entity, such as an S corporation or partnership. Taxpayers receiving TARP money are not eligible for the liberalized carryback rules.
To obtain the largest refund possible under the law, a taxpayer must do some substantial planning. One must select the proper year to elect carryback, decide which years to carry back the losses to and determine the actual amount of the loss.
For some taxpayers, it may, in fact, not be beneficial to carry back losses to prior years and to use their losses in future years by irrevocably electing to relinquish a loss carryback. Every taxpayer’s situation is different, and generalizations cannot be made.