Net Operating Loss Carryback Period Extended for Certain Small Businesses

The recently enacted American Recovery and Reinvestment Act of 2009 (the stimulus bill) extended the carryback period over which certain 2008 and 2009 net operating losses (NOLs) can be applied against prior years’ taxable income. For certain small businesses, this carryback period has been extended from two years to up to five years. The use of the additional carryback period is wholly elective at the option of the small business, but may require action as soon as April 17, 2009 for those small businesses wishing to take advantage of the extended carryback period. On March 16, 2009, the Internal Revenue Service (IRS) published guidance on how to make the extended carryback election and on other administrative aspects of the extended carryback period.

Section 1211 of the stimulus bill allows an “eligible small business” to elect to apply its NOL for its tax year ending in 2008 (or, at the election of a business with a noncalendar tax year, beginning in 2008) against taxable income earned in its prior five tax years. Absent this extension, losses could only be carried back to the prior two tax years. To qualify as an “eligible small business” for purposes of Section 1211, the business cannot have average annual gross revenues over a three-year period (ending with the tax year of the NOL to be carried back, as interpreted by the IRS) in excess of $15,000,000.

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