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One week left to go back five years with your tax losses

September 08, 2009

A deadline looms for taxpayers who had a bad year in 2008.

One of the few silver linings to a bad year is the opportunity to carry back tax losses. The federal income tax law normally allows you to use a current "net operating loss," or NOL, to offset taxable income as far as two years back. A taxpayer with a 2008 taxable loss can carry those losses back to reduce taxable income for 2006 and 2007. This retroactively reduces the taxable income for those years, generating a tax refund.

For 2008 losses, Congress enacted a special provision allowing some taxpayers to carry losses back as far as five years. That is a boon to taxpayers who may not have had great years in 2006 and 2007, but who did well in 2003-2005. But taxpayers wanting to use the five-year carryback face a looming deadline.

Corporations that want to use the five-year carryback have only until September 15 to take the five-year carryback. Any carryback claims filed later only get the normal two-year carryback. Corporations normally will file their loss carryback claims on Form 1139.

Individuals who want to use the five-year carryback have until October 15 to file Form 1045 to carry back the losses. This applies to losses from Schedule C proprietorships, Schedule F farms and Schedule E K-1 or rental activities.

Unfortunately, the five-year carryback rule isn't available for everybody's losses. Unless the loss comes from a business with gross receipts averaging less than $15 million for the prior three years, only the two-year loss carryback is available. If your losses come from a K-1 from an S corporation or partnership, the $15 million test is applied to the entity issuing the K-1, even if your share of the gross receipts is less than $15 million. Complete details on claiming the losses can be found in Rev. Proc. 2009-26. Contact your tax pro to make sure you do the right thing with your NOLs.

Congress hasn't extended the five-year carryback rule to cover 2009 losses, so if this is your bad year, the only thing you can do to get a five-year carryback is to contact your Congresscritter.

Iowa only allows a two-year carryback for 2008 corporation losses. That's a bargain, though, compared to what's in store: the legislature has already repealed carrybacks altogether for corporations with 2009 state NOLs. Those losses only carry forward to offset future income -- if the corporation lives to see it.

When you file your carryback claim, be sure to mail it Certified Mail, Return Receipt Requested, so you can prove that you filed on time. It costs a few bucks extra, but unless you have great faith that both the Postal Service and the IRS will properly process your forms, it's well worth it to have that postmark in hand.