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IRS Gives Details on Expanded NOL Carryback Provisions

The Internal Revenue Service on March 16 issued guidance on how home builders and other small businesses can implement the expanded Net Operating Loss (NOL) carryback provisions of the economic stimulus package signed into law last month.

Under the provision, businesses with average gross receipts of no more than $15 million over the prior three years and with a Net Operating Loss in 2008 can elect to offset this loss against income earned in up to the five prior years. Typically, an NOL can only be carried back for two years.

To accommodate the change in the tax law, the IRS has updated the instructions for two key forms — Form 1045 and Form 1139 — on which small businesses can make use of the special carryback provision for tax year 2008. These forms are used to accelerate the payment of refunds.

Legal guidance by the IRS outlining specific details of the NOL extension was released last week in Revenue Procedure 2009-19.

“The new net operating loss provisions could throw a lifeline to struggling businesses, providing them with a quick infusion of cash,” said IRS Commissioner Doug Shulman. “We wanted to make it as easy as possible for small businesses to take advantage of these key tax benefits.”

With the economic downturn and the new law, the IRS said in its release that it expects record numbers of small businesses to be eligible for the refunds. The IRS said that it is putting in special steps to ensure timely processing of these refunds to help small businesses during this difficult period.

Small businesses with large losses in 2008 may be able to benefit fully from those losses now, rather than waiting until claiming them on future tax returns.

The normal two-year carryback remains available if the small business does not elect the special carryback provision. If the loss exceeds the income for the carryback period, the taxpayer can continue to carry forward the remaining balance of the NOL for up to 20 years.

For small businesses that use a fiscal year, this special carryback can be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it cannot be changed.

There are several methods a small business can use to elect the new provision as detailed in the Revenue Procedure, according to the IRS.

If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, it must revoke that previous election on or before April 17, 2009.

Generally, small businesses that are not corporations — including sole proprietorships filing schedule C with their Form 1040 — can accelerate a refund by using Form 1045, Application for Tentative Refund.

Corporations with NOLs can also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.

The IRS said that it will be closely monitoring these filings and will provide additional staff as needed to process these forms. The IRS will work to issue refunds within 45 days or even earlier to the degree possible.

In addition, Frequently Asked Questions have been posted on the IRS.gov Web site. Small businesses that file Form 1040 can also call 800-829-1040 with NOL questions. Corporations can contact 800-829-4933.

Form 1045 or Form 1139, whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. In addition, the current year’s tax return must be filed by the date the Form 1045 or Form 1139 is filed. Form 1045 and Form 1139 are filed at the same place the taxpayer’s return is filed, as listed on the return instructions.

Accelerated refunds paid via Form 1045 or Form 1139 are described as “tentative” because the applications for refunds are potentially subject to review at a later date. The instructions for these forms provide more information on the accelerated refund option.

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