New Tax Law Lets a 2008 Loss Generate a Return

Of all the provisions in the stimulus package, the one struggling business owners can take advantage of immediately is the extension of the Net Operating Loss Carryback Period. We say struggling, because the business owner would have to show a loss in 2008 to qualify for this benefit. The new NOL law allows small businesses to deduct losses in 2008 against profits from prior years. In the past, businesses could only go back two years, but now businesses can carryback NOL up to five years. The one caveat is that the business must have shown average annual gross receipts of $15 million or less for the three-year-tax period ending in the tax period in which the loss arose.

For example, if Pop Top Widgets showed a Net Operating Loss of $200,000 in 2008, they could use that loss to get a refund for taxes paid in the past, until 2003. The NOL would be applied to taxes paid in the past 5 years, starting at the earliest date. So if Pop Top made a taxable income of $50,000 in 2003, $50,000 in 2004, $100,000 in 2005, $25,000 in 2006 and $25,000 in 2007, it may elect to carry its 2008 NOL back for five years offsetting its income for 2003, 2004 and 2005 ($50K + $50K + $100K) and would get a refund of $37,250 (the sum of the taxes paid those years). And since Pop Top didn’t elect to carry its 2008 back NOL only four years (2004, 2005, 2006 and 2007), it still has 2007 revenue to offset in case of a loss in 2009. In an upcoming tax tip, we will talk about how some businesses can use a strategy called Cost Segregation to accelerate depreciation to further take advantage of this new law.

For more information on the new NOL Carryback Period, or other questions regarding new tax laws for 2009, please contact an associate at Wendroff & Associates at 703-553-1099. Also, please look out for our Online Entrepreneurship Series in Spring of 2009, which will include educational webinars, our online Ask a CPA series and podcasts with leading entrepreneurial minds around the country. The programs will all be free and online.

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This blog is about business tips for Small Business Owners and Entrepreneurs. It will be updated monthly.