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IRS eases up on electing 5-year NOL carryback

April 29, 2009

The IRS has backed off a tricky rule that would have cost many taxpayers the ability to use the temporary 5-year net operating loss carryback.

The regular federal net operating loss carryback period is two years. That allows taxpayers to get refunds on taxes paid in the prior two years if they have a business loss in the third year. A special provision allows taxpayers to carryback 2008 NOLs up to five years.

The initial IRS guidance (Rev. Proc. 2009-19) required taxpayers to elect the five year carryback on the the tax return for the loss year -- even though the loss carryback refund is claimed on a separate filing. This could have caused taxpayers to inadvertently lose the ability to use the five year carryabck.

Newly issued Rev. Proc. 2009-26 fixes this problem by allowing taxpayers to elect the five year carryback on their loss carryback claim - not just the original return. Individuals can claim the five year carryback on Form 1045 or 1040-X; corporations can claim it on Form 1139 or an amended return for the carryback year.

This new procedure fixes the IRS problems with the five-year carryback, but only Congress can fix the bigger problems:

- It only apples to businesses with gross receipts up to $15 million.
- It only applies to 2008 losses. All indications are that 2009 will be much worse than 2008 for most businesses.

Of course, it could be worse. Iowa has repealed the corporate NOL carryback altogether for 2009 losses, allowing only carryforwards.

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