November 10, 2009
On November 6, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"). Among other things, the Act extends the net operating loss ("NOL") carryback period from two years to as much as five years for tax years beginning in or ending in 2008 or 2009. To pay for the extension of the NOL carryback period, the Act delays until 2018 the implementation of changes in interest expense allocations that were expected to increase the foreign tax credits that could be claimed by U.S. corporations.
Five-Year Carryback of Net Operating Losses
An NOL generally represents the amount by which a taxpayer’s business deductions exceed its gross income. Under present law, an NOL may generally be carried back two years and carried over 20 years to offset taxable income in such years.
The American Recovery and Reinvestment Act of 2009 (the "ARRA") extended the NOL carryback period from two to up to five years for tax years beginning in or ending in 2008. However, the ARRA extension only applied to small businesses with gross receipts of $15 million or less.
The Act allows all businesses–except those that received funds under the Troubled Asset Relief Program–to carry back NOLs for up to five years for losses incurred in a tax year beginning or ending in either 2008 or 2009 (at the election of the taxpayer). The Act sets no limit on carrybacks for the first four years of the carryback period, but for year five (i.e., generally 2003 in the case of 2008 NOLs, or 2004 in the case of 2009 NOLs) the carryback is limited to 50% of the taxpayer’s taxable income in that year.
Pursuant to the Act, eligible small businesses (gross receipts of $15 million or less) that previously elected to carry back an “applicable 2008 NOL” under the ARRA are allowed to elect to carry back the “applicable 2008 NOL” and are not limited to the 50% limitation described above with respect to taxable income in the fifth year of the carryback period. An "applicable 2008 NOL" was defined under the ARRA as an NOL for any taxable year ending in 2008 or, if elected by the taxpayer, the NOL for any taxable year beginning in 2008. An eligible small business that timely made (or timely makes) an election under the provision as in effect on the day before the enactment of the Act to carry back its "applicable 2008 NOL" may also elect to carry back a 2009 NOL under the provisions of the Act.
Life Insurance Companies
Under present law, in lieu of the deduction for NOLs allowed to other corporations, a life insurance company is permitted to treat a "loss from operations" (as defined under section 810(c) of the Internal Revenue Code of 1986) for any taxable year as an operations loss carryback to each of the three taxable years preceding the loss year and an operations loss carryover to each of the 15 taxable years following the loss year.
The Act provides an election to life insurance companies to increase the present law carryback period for an "applicable loss from operations" from three years to up to five years. An "applicable loss from operations" is the taxpayer’s loss from operations for any taxable year beginning or ending in either 2008 or 2009. A 50-percent of taxable income limitation applies to the fifth year preceding the loss year.
Alternative Tax Net Operating Loss Deduction
Under present law, for purposes of computing the alternative minimum tax, a taxpayer’s NOL deduction will not reduce the taxpayer’s alternative minimum taxable income ("AMTI") by more than 90 percent of the AMTI.
The Act suspends the 90% limitation on the use of any alternative tax NOL deduction attributable to carrybacks of the applicable NOL for which an extended carryback period is elected.
Delay in Application of Worldwide Allocation of Interest
In 2004, new legislation permitted U.S. taxpayers to make certain changes in the way that interest expense deductions were allocated to foreign and U.S. source income. These changes were expected to increase the amount of foreign tax credits that U.S. corporations could claim, but the legislation had a deferred effective date, originally becoming effective only for tax years beginning after December 31, 2008, and later delayed until tax years beginning after December 31, 2010. The Act delays further the effective date of the worldwide interest allocation rules until taxable years beginning after December 31, 2017. Pursuant to the Act, the required dates for making the worldwide affiliated group election and the financial institution group election are changed accordingly.
The Act also eliminates the special phase-in rule that would have applied to the first taxable year to which the worldwide interest allocation rules applied.
The Act is effective for net operating losses arising in tax years ending after December 31, 2007. A taxpayer must make the carryback election by the extended due date for filing the return for the taxpayer’s last taxable year beginning in 2009. An election, once made, is irrevocable.
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments. If you have any questions, please contact the Gibson, Dunn & Crutcher attorney with whom you work or any of the attorneys listed below.
Charles F. Feldman (212-351-3908, [email protected])
David B. Rosenauer (212-351-3853, [email protected])
Jeffrey M. Trinklein (212-351-2344, [email protected])
Romina Weiss (212-351-3929, [email protected])
Hatef Behnia (213-229-7534, [email protected])
Stephen L. Tolles (213-229-7502, [email protected])
Paul S. Issler (213-229-7763, [email protected])
Sean Feller (213-229-7579, [email protected])
Dora Arash (213-229-7134, [email protected])
J. Nicholson Thomas (213-229-7628, [email protected])
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