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Ways and Means passes stimulus bill, but weakens 5-year NOL carryback

January 23, 2009

The House Ways and Means Committee passed the tax portion of the latest stimulus bill, but with a weird change. The new version says that taxpayers who elect a five-year carryback for their 2008 and 2009 net operating loss have to reduce the NOL by 10%.

It's hard to see where there is any policy wisdom in this change. The whole purpose of the NOL carryback and carryforward provisions is to mitigate the possiblity of businesses being taxed on more than 100% of their taxable income. If there were no carryover provisions, a business could lose a million dollars in year 1, make a million in year two, and pay tax on a million dollars of income when there was no net income over the two year period.

If this provision remains, businesses will have to make a complex bet on whether it's worth more to carry back a loss 3-5 years with a 10% haircut than to carry it back only two years or forward to offset future income. Whatever the era of hope and change will be, it doesn't look like simplicity will be part of it.

The TaxProf has a roundup.

Tags: stimulus.TaxProf.