Tax Provision Helps Small Business in 2009 Filing

Guest post by Alan Olsen is Managing Partner of Greenstein, Rogoff, Olsen & Co. LLP (GROCO®), edited by Jennifer Fortney

Ugh, it’s tax time. The brutal reality that each year makes us hopefully say “it will be better next year” and then next year comes…quite quickly. I am, personally, thankful that 2009 is over and we are beginning to slowly come out of the recession and look ahead to more fruitful times.

Understandably so, a larger number of small business owners than ever before will file tax returns for 2009 reflecting a loss due to the poor economy. That being said, small businesses may believe that they just have to take the losses from 2009 and swallow them. That’s not true. A new tax law provides relief to small businesses suffering these losses called, Net Operating Losses (NOL).

NOL – A period in which a company’s allowable tax deductions
are greater than its taxable income, resulting in a negative
taxable income. This generally occurs when a company has
incurred more expenses than revenues during the period. (Investopedia.com)

“The net operating loss for the company can generally be used to recover past tax payments, or reduce future tax payments. The reasoning behind this is that because organizations are required to pay taxes when it earns money, it deserves some form of tax relief when it loses money.”

Prior to 2008, the Internal Revenue Service allowed small businesses to carry back net operating losses and offset the prior two years taxable income. This reduction on prior year taxable income gave small businesses relief by refunding tax paid from prior years. For businesses generating Net Operating Losses for tax years ending after 2007 and beginning before 2010, the IRS passed a new tax provision extending the carry back period to five years!

According to Investopedia.com;
“if a company has a net operating loss, it can apply this tax relief in two ways or through a combination of both. The company can apply the net operating loss to their past tax payments and receive a tax credit. It could also apply the net operating loss to future income tax payments, reducing payments they need to make in future periods. The terms of the tax relief and how it can be applied varies by jurisdiction but usually the NOL can be applied to the past few years (2-3) and much more to the future (7-10) years.”

NOL is really just fancy jargon for the company losing money.
It makes sense that you should  have to pay tax before you get
“out of the hole”. For example, say you lose $1 million in your
first  year of business and make $5 million the next year. It
wouldn’t be fair for you to have to pay tax on a profit of $5
million, because you are really only ahead by $4 million ($5
million profit – the  $1 million loss).

Small businesses should consult their tax professional about this tax provision. The IRS is providing these refunds very quickly – often in less than 45 days – and an additional form can be filed to get your refund even quicker. A “Corporation Application for Tentative Refund” can also be used by corporations to file Net Operating Losses carry-backs. These forms should be filed with the current year tax return within one year of the Net Operating Losses.

The new law allowing businesses to elect for Net Operating Losses has provisions that you should be aware of, including the following (always work with a tax professional to understand the implications):

1. The amount of a NOL that can be carried back to the fifth tax year is limited to 50% of the taxable income for that tax year,

2.  The 50% limit does not apply to a 2008 eligible small business NOL. A 2008 eligible small business (ESB) qualifies by meeting these criteria:

a. The company needs to make an irrevocable election to carry back the NET OPERATING LOSSES under IRC 172(b)(1),
b. The company must average gross receipts of $15 million or less over the three year period that ends with the loss of income,
c. If the business is a partnership or S corporation, the three year test is applied at the entity level. However, the partner or shareholder makes the NOL election on their individual tax return.

3. A taxpayer may elect an extended carry back period for only one tax year (i.e. 2008 or 2009). However, if the company qualifies as a 2008 ESB they can also make the same election in 2009.

4. The election must be made by the extended due date of the tax return.
Unfortunately, at the time being, truly small businesses with revenues under $15M, and a majority of businesses in the U.S., have few relief options. Some states are/have implemented their own tax relief programs for small businesses (anything under this amount is considered a mom and pop business). In times like this, it can be worth the expense to locate a tax professional specializing in truly small business to provide information on possible tax relief programs.


Alan Olsen is Managing Partner of Greenstein, Rogoff, Olsen & Co. LLP (GROCO®) and has worked with some of the most successful entrepreneurs in the world. His firm has been named one of the Best-Managed CPA Firms in the U.S. by Inside Public Accounting. Source: http://www.irs.gov/newsroom/article/0,,id=205329,00.htmlhttp://www.irs.gov/irb/2009-19_IRB/ar09.html
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