New Tax Rule Off ers Way To Recoup Losses

Guajardo offers a Q&A on “carry-back’’ rules for IRS reporting of net operating losses brought about by the ARRA.

By Leslie Guajardo

Leslie V. Guajardo, CPA, CCIFP, is a partner at Padgett, Stratemann & Co. LLP in San Antonio. She can be reached at Leslie.Guajardo@padgett-cpa.com.

The Texas construction industry is well aware that the state should receive about $16 billion as part of the American Recovery and Reinvestment Act. What many still do not realize is that the law created changes to the tax code that can bring contractors some relief, and there’s still time to act.

The most significant of the changes for contractors relates to tax reporting on operating losses. Another tax change worth mentioning is Congress’ vote to extend a first-year bonus depreciation of 50% through Dec. 31, 2009. Businesses can immediately deduct half of many new investment costs.

The most important tax change that ARRA brought contractors, however, relates to “carry-back’’ rules on the reporting of net operating losses. One of the most valuable assets for a troubled business can be the tax refunds recoverable on the deduction of operating losses. Normally when a business incurs a tax loss, that loss can be applied to the prior two tax years to recover previously paid taxes. However, the ARRA includes a provision that allows small businesses with a 2008 tax net-operating loss to be electively carried back to either the fifth, fourth or third prior tax year. Any excess is then carried forward to subsequent tax years.

This is an important change for small and mid-size contractors performing well until the recession began in 2007. There isn’t a lot of time to take advantage of this tax change, but it is worth pursuing. It offers a way to recover losses, particularly large ones in 2008.

For a contractor who uses a fiscal year, the special carry-back may be used for a NOL in either a tax year that ends in ‘08 or a tax year that begins in ‘08. Once a taxpayer makes this election, it may not be changed. To qualify for the five-year carry-back provision, a contractor must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years.

I have drawn on information from the IRS to answer the following questions:

Question: My ‘08 return was filed. Now I want to amend it. How might I do this?

IRS: If the ‘08 return already has been filed, you may still make the election by the later of: six months after the due date of the return (determined without extensions) or April 17, 2009. To make the election after you’ve already filed, file an application for tentative refund (Form 1045 or Form 1139) or an amended return for the earliest tax year of the carry-back period selected (three, four or five years). No statement is required to be attached to the forms. It must be filed by the later of six months after the due date of the return for the tax year of the loss (determined without extensions) or April 17, 2009.

Q: Can I use it for a 2009 return?

IRS: The law states that the election is available for the tax year ending in ‘08, unless the taxpayer elects the carry-back for the tax year beginning in ‘08. A calendar year taxpayer can elect only for ‘08. A fiscal-year taxpayer whose year ends in ‘08 can elect either for an FY ending in ‘08 or an FY beginning in ‘08 and ending in ‘09, but not both.

Q: Will the IRS accept any exceptions?

IRS: If the taxpayer has filed the return in a timely manner without making the election, an automatic six-month extension from the return due date is available.

Q: Do I have to carry back my NOL for the full five-year period?

IRS: No, you can elect to carry back the loss for three to five years.

Q: My business operates on an FY ending in the middle of ‘08, which year do I use?

IRS: A contractor may elect for either ‘08 or ‘09, but not both. Whichever you choose, remember that this is an irrevocable election, and can be made for only one tax year.

Q: I had slightly more than $15 million in gross receipts last year. Am I eligible for the five-year carry back?

IRS: To qualify for this five-year carry-back election, a contractor must have an average of less than $15 million in gross receipts over a three-year period ending with the year giving rise to the loss. If your gross receipts average more than $15 million over the three-year period, the two-year carry-back applies.