New Tax Law for Net Operating Loss Carrybacks

By: Richard Bell, CPA

The old rules for companies defined as proprietorships, partnerships, or corporations, with losses for the year would be to either carry the loss back to the prior two years or elect to carry the loss forward for 20 years. For example, if you incurred a net operating loss in 2007, you could carry the loss back to a taxable income year 2005 or 2006, and if the full loss was not utilized, you could carry the loss forward to 2008 and beyond for 20 years.

For 2008, if you have a loss and qualify as a small business type, defined to be a company with prior three average revenues of 15 million or less, you may elect to carry the loss back for three additional years and may opt to choose the specific year of loss. For example, if you have a net operating loss in 2008, you may carryback the loss to 2007, '06, '05, '04, or '03. It is not necessary to go to '03 first; you can start with '04 or '05 if you so choose. For losses not absorbed, you may again carry the losses forward for 20 years. Further, you may retain the right to forego the carrybacks and elect to carry the losses forward to 2009 and beyond.

There are always exceptions and special rules to the general rules. For instance you may have filed an election to forego the loss and carry it forward. Generally, this election is irrevocable but the new tax law allows you to amend this election to take advantage of the new five-year carryback period. Further, if you file a corporate C type return that is a fiscal year that began in 2007 and ends in 2008, you can make a special election to treat the return as a 2008 year return instead of a 2007 return, and file the losses in the carryback period.

If you have questions on how to best utilize your business losses, contact Pancho.espejo@bellandcompany.net or Andrew.griffith@bellandcompany.net in our office. They will be glad to assist you.