Thanks to the economic stimulus package enacted last month, owners of small businesses that had net operating losses in 2008 may be able to get back some of the taxes they paid on profits in better years. The IRS issued guidance March 16 to help them figure out whether this is a good idea. Some businesses need to decide by April 17 whether to avail themselves of this one-time opportunity.
Before the American Recovery and Reinvestment Act (ARRA) became law in February, small businesses were allowed to carry losses back for two years and then carry any remaining losses forward for up to 20 years. Under ARRA, small businesses can elect to carry their 2008 losses back for up to five years and file an accelerated claim for refund of taxes paid previously. Any 2008 losses that aren’t recovered by making this special carry-back election then can be carried forward.
The election is available to businesses with average gross receipts of less than $15 million for the three previous years.
Businesses that keep their books using fiscal years rather than calendar years can choose whether to apply the ARRA provision for either the year ending in 2008 or the year that began in 2008. Businesses that already filed their 2008 returns and want to use the longer carry-back for that year’s losses must file appropriate forms making the election by six months after the return was filed or April 17, 2009, whichever is later. Once the choice is made, the election is irrevocable, so it’s important to consider all angles and make the most advantageous decision.
To make the election, the IRS said taxpayers should attach a statement to the return saying the business is electing to apply Section 172(b)(1)(H) of the tax code. The statement should specify the carry-back period — i.e., whether the business elects to carry the losses back for three, four, or five years. Fiscal-year businesses choosing to apply the ARRA provision to years that began in 2008 should include that information in their statements.
Small business owners who report their business profits on Schedule C also will want to file Form 1045, Application for a Tentative Refund, in order to claim their accelerated refunds. Corporations can claim accelerated refunds by filing Form 1139, Corporation Application for Tentative Refund. To get stimulus money into the economy quickly, the IRS said it would try to issue refunds within 45 days of filing “or even earlier to the degree possible.” The IRS noted that the forms refer to these refunds as “tentative” because these applications are subject to review “at a later date.”
Considerations in making the election
There are circumstances in which a small business might not benefit from carrying losses back as far as possible. For example, if the 2008 loss is less than the business’s 2006 profit, there may be no advantage to carrying the loss back to a previous year unless the business previously paid taxes at a higher rate. On the other hand, if the business expects to lose money n 2009 as well, it may want to carry the 2008 losses back further and preserve its 2007 profit for offsetting this year’s loss. With careful planning, business owners may be able to increase the amount of their refunds by attributing losses to the years in which they paid taxes at the highest rate.
Other factors also can complicate the business owner’s decision. For example, if the taxpayer is subject to the alternative minimum tax or had an excess interest loss in any of the carry-back years, the considerations may be different.
As is often true with taxes, it’s not necessarily an easy decision. Since the election is irrevocable, owners of businesses with losses in 2008 may want to consult with a tax adviser before filing.
