As tax consultants, we are always trying to find valuable tax savings ideas for our clients. In November 2009 the government provided significant help in this quest with the passage of the new Worker Homeownership and Business Assistance Act of 2009, temporarily expanding the net operating loss carryback provisions, among other items. There is a tremendous benefit when businesses are allowed to carry losses back and obtain a refund from the government. When they can be carried back to a year of their choice to maximize the benefit, this enhancement provides a potentially significant bonus and a gift too good to pass up.
Let me provide a little background on why this temporary change is so important. As you are probably aware, normally business losses may be carried back 2 years to obtain a refund of taxes paid in those years. For example, a 2006 loss may be carried only to 2004 and 2005. If you did not pay tax in 2004 or 2005, these losses may be carried forward 20 years.
Carrying losses forward is a good tax strategy but most would prefer to have the money now. These carryback rules are for both small business, S-corporations and partnerships (which pass their losses through to owners), or C corporations (which pay tax at the entity level). In many cases, state laws allow for some form of carryback, which even sweetens the strategy.
Getting Better: The American Recovery and Reinvestment Act, passed in February 2009, allowed losses generated in tax year 2008 (only) to be carried back 2, 3, 4 or 5 years and the taxpayer was allowed to pick the year where they could receive maximum benefit. The year of carryback was required to be elected with the 2008 return. This advantageous 5-year carryback period only applied to qualified small businesses—generally those that had less than $15 million in gross receipts. This was an excellent opportunity but little did we know the best was yet to come.
Even Better: Fortunately, on November 6, 2009, the Worker Homeownership and Business Assistance Act of 2009 was passed. In addition to expanding the home buyer’s credit to more than first time homebuyers, the new carryback provision did not limit the benefit to only small businesses, but made it available to all taxpayers! Small businesses that already carried their 2008 losses back 5-years can now carry back 2009 losses to the 5 previous years also.
Additionally business with revenue of greater than $15 million can carry 2008 or 2009 losses back 5 years. If on your 2008 return, you did not elect the most advantageous year, no problem—in certain instances the 2008 election may be amended to maximize the benefit. Every company regardless of size and profitability should look at this tax provision and expressly ask: how can we maximize the benefit?
We are assisting our clients with this question. We are working with clients and business leaders to maximize their carryback refund potential. Here are some items you can do to maximize your refund claim:
1. Look at the original 2008 carryback strategy. In certain instances, amending this carryback claim may result in a larger refund (see real example below).
2. Analyze the 2008 returns for items that may increase the 2008 loss, amend where appropriate and therefore increase carryback refund claim.
3. Project 2009 activity; work towards maximizing the 2009 loss either through using other tax strategies (such as bonus depreciation) and review current tax methodologies in order to generate as large a loss as possible for 2009.
Here is an example that will get you motivated. For one of our clients we prepared a 2008 loss carryback claim. In accordance with the previous American Recovery and Reinvestment Act, we carried this loss back 2 years, since they were not considered a small business. We managed to obtain a refund of $540,000 paid in 2006.
However, upon announcement of the recent tax act in November, we revisited this carryback claim and are now able to make en election to carry this loss back 5 years. Instead of the $540,000 refund, we are now able to apply for a $1.22 million refund—all on the same loss—because we were able to carry the loss back to a year where the taxpayer was in a higher tax bracket.
We had to agree with the client’s words when he heard about the increase in refund amount: “Unbelievable, remarkable, WOW!” I think I may have even gotten a permanent spot on his fishing boat.
We encourage each of you to contact your financial professional and do some planning around this very, very beneficial tax change. Hopefully this tax law change can help get 2010 off to a good start.
George W. Bohlé Jr. is a managing partner at Blair, Bohlé & Whitsitt, PLLC, a CPA firm that provides accounting, assurance, tax compliance and planning services in addition to strategic planning and tax minimization strategies to privately held businesses. Contact him at 704-841-9800 or visit www.bbwpllc.com.