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Stimulus bill NOL question
February 16, 2009
A few questions have come up on our posts on the new tax bill. One relates to the provisions allowing a five-year carryback of net operating losses for businesses with up to $15 million in gross receipts. We reported that owners of pass-through entities take into account their share of pass-through gross receipts to determine their eligibility for the credit.
The definition for an eligible small business is defined by new code secton 172(b)(1)(H). It provides that the 5-year carryback is available to a "eligible small business" defined in section 172(b)(1)(F)(iii), which says:
For purposes of this subparagraph, the term “small business” means a corporation or partnership which meets the gross receipts test of section 448(c) for the taxable year in which the loss arose (or, in the case of a sole proprietorship, which would meet such test if such proprietorship were a corporation).
The new law definition modifies "the gross receipts test of section 448(c)," which has a $5 million limit, for this purpose; it uses a $15 million ceiling.
Now what's confusing here is that of course a partnership can't by itself have a "net operating loss," as it doesn't pay its own taxes. Yet if the partnership loss results in an NOL for an individual owner ("sole proprietor"), will it be available to the individual for the five-year carryback? I think is should be available to the individual ("sole proprietor"), or the provision is pointless.
It's not clear to me what happens if the partnership's gross receipts exceed $15 million but its owners all have under $15 million in gross receipts. I am guessing that the IRS will say that if the $15 million test will be applied at both the entity and owner levels. Of course, Congress should have done a better job of drafting this (the committee reports don't help), but you can't expect much from an enormous bill drafted in back rooms in a great hurry.
Why do I think the individual owners have to take into account their share of partnership gross receipts in measuring their own for the $15 million test? It's a long-standing provision in the tax law that owners of pass-throughs take into account their share of the entity's gross receipts in determining their own. See, for example, Rev. Rul. 71-455.
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Comments
Is it clear that the 3 year testing period for average annual gross receipts is 2006 + 2007 + 2008?
Sec 448(c) was written to apply the test to the "prior taxable year(s)" to use the cash method for the current year. If the testing period is 2005 + 2006 + 2007 the number of eligible small businesses will be substantially smaller, especially in the real estate sector.
I know our clients are hoping to get substantial refunds to help capitalize their businesses.
Posted by: E. Wayne Williams | February 16, 2009 1:34 PM
Wayne, I believe it is 2005-2007 for 2008 NOLs, as the test relates for the "for the 3-taxable-year period ending with such prior taxable year."
Posted by: Joe Kristan | February 16, 2009 1:44 PM
I believe it is 05-06-07 testing period as well.
I'm not sure that an individual would have to aggregate their share of gross receipts from all pass-through entities...I do wish the law was written more clearly. I was thinking it would work similar to 172(b)(1)(F) related to eligible disaster losses where the disaster NOL is separated from the total NOL and allowed the longer carryback period.
Meaning that a taxpayer may need to bifurcate their NOL between those that come from small businesses (5-year carryback) and those that come from non-small businesses (2-year carryback). It would seem to be simpler to test what is a small business on the entity level rather than an aggregage individual level. It would also make some of the provisions in the law relating to partnerships, etc. make more sense.
Posted by: Tracy | February 17, 2009 10:03 AM
I believe it's 06-07-08 since 448(c) says the 3 taxable-year period the taxpayer must test for ends with prior year you are testing. Hence, if the NOL relates to a prior year (2008), your 3 year test ends with such prior year (2008). CCH appears to agree with this interpretation, but RIA appears to take the other interpretation, which is determental to many real estate partnerships and LLC's.
Posted by: Scot | February 27, 2009 6:00 PM