Net Operating Loss (NOL) Carryback Relief

Background

Under existing law, a net operating loss (NOL) generally means the amount by which a taxpayer’s business deductions exceed its gross income. For most industries, a NOL may be carried back to the two preceding years and carried forward 20 years to offset taxable income in such years. This allows the taxpayer to recapture a portion of taxes it paid in the prior two years or over the course of the next 20 years. This law recognizes that few business cycles mirror a calendar year. Therefore, the provision allows income averaging over the course of a full business cycle, which is typically several years long. In other words, it provides no incremental benefit, other than changing the timing of when losses can be accounted for.

Status (as of 3/3/10)

On Nov. 4, 2009, the Senate passed the Emergency Unemployment Compensation Extension Act by a vote of 98 to 0, and President Obama signed the bill into law just days later. In addition to extending unemployment insurance benefits to out?of?work Americans and the first-time homebuyer credit, the legislation expanded net operating loss carryback provisions.

Under current law, net operating losses may generally be carried back for two years. In the stimulus package passed earlier in 2009, the net operating loss carryback period was extended from two to five years for tax years beginning in or ending in 2008 for small businesses with gross receipts of $15 million or less. The new legislation will allow all businesses to carryback net operating losses for up to five years for losses incurred either in 2008 or 2009, but not both. Businesses would be able to offset 50 percent of the available income from the fifth year and 100 percent of all income in the remaining four carryback years.  The provision is generally effective for net operating losses arising in taxable years ending after December 31, 2007.