NET OPERATING LOSSES (“NOLs”) - CARRYBACKS AND CARRYOVERS
[ACTION MAY BE NEEDED BY OCTOBER
31, 2002]
HAROLD S. SMALL, J.D., CPA, and AEP
When economic times are difficult,
sometimes a source of funds may be tax refunds because of the application of
Net Operating Losses (“NOL’s”). This issue is more important today not just
because of our current economy, but because there is a deadline for action of
October 31, 2002 that may apply to your circumstance.
As the CCH 2002 Master Tax Guide States,
most taxpayers are “... allowed to carry back an NOL from a trade or business
to apply as a deduction against prior income and to deduct [it] from [a]
succeeding years’ income...” Under
Internal Revenue Code (“Code”) Section 172(b), subject to certain statutory
exceptions, the taxpayers eligible to use the NOL include corporations,
individuals, estates and trusts, and partners.
Generally NOL’s are not available to S
corporations and partnerships, but the principals are entitled to the benefit
of their distributive share of an NOL. Over-simplified, the NOL for the purposes of
the Code provisions consists of the excess of allowable deductions over gross
income. Some statutory adjustments are
needed to complete the calculation. A
detailed discussion is beyond the scope of this article, which is intended to
point out a recent change and a looming deadline.
The 2002 Tax Act has provisions that are
important to consideration of the NOL and its application for the current and
succeeding years. The new provisions are
important because they
include the extension of the carryback
period from two to five years for NOLs arising in tax
years 2001 and 2002. However, a taxpayer
has the ability to waive the five-year carryback
period, by the tax return due date for the loss year (including timely filed
extensions). If an election is made the
existing rules relating to NOLs will apply.
The Internal Revenue Service (“IRS”) issued
Rev. Proc. 2002-40, IRB 2002-23 on June 10, 2002 to address certain issues raised relating to the application of the NOL and its
effective period. It states that it
“...is effective for NOLs arising in taxable years
ending after December 31, 2000. This
Rev. Proc. Indicates that taxpayers that previously elected to waive the NOL carryback period for years ending in 2001 or 2002 may
revoke the election and apply the new five-year carryback
period by following the procedures indicated in this Rev. Proc. by October 31,
2002. Please note the immediacy of the
action needed. The revocation is also
supposed to apply for AMT purposes. No
actions or filings appear to be needed if a taxpayer does not want to revoke
the previously filed election.
The following is a summary of the
procedures to follow for the revocation of the previously elected carryback period.
! For
taxpayers that want to use the five-year carryback
period and that previously made the election to waive the carryback
period or those that applied the two-year carryback
period, they must timely file the appropriate form using the five-year carryback period.
! For
taxpayers that did not elect to waive the carryback
period and those that did not apply the two-year carryback
period, but that want to relinquish the five-year carryback
period, they must file the appropriate form using a two-year carryback period.
This must be done even if no refund or change in tax liability is shown
on the form.
! Taxpayers
that previously elected a waiver of the carryback
period and now want to use the five-year period should type or print at the top
of the appropriate form: “Revocation of NOL carryback
waiver pursuant to Rev. Proc. 2002-40.”
! A
similar action should be taken by taxpayers that previously applied the
two-year carryback and now want the five-year carryback by typing or printing at the top of the
appropriate form: “Amended refund claim pursuant to Rev. Proc. 20020-40.”
The
last two actions may not be needed, depending upon changes that may be
implemented by the IRS and their use of the newly revised forms. Your tax preparer should be able to assist
you. Also, special rules apply to
consolidated groups (See T.D. 8997 and Reg. 122564-02 published May 31, 2002).
The appropriate forms include IRS Form
1139, 1120X, 1045, 1040X, 1045 and 1041, depending upon the taxpayer and the
required forms. Certain of these tax
forms were modified within the past two months to address these changes. It is important that the correct (current)
tax form is used and that it contains the appropriate statements and elections
as allowed.
You should consult with your tax preparer
regarding the issues raised above and consider the implications of these
changes and what actions, if any, you want to take. However, be mindful of the October 31, 2002
deadline.
THE FOREGOING
CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS
FOR CONSIDERATION IN BUSINESS AND TAX PLANNING.
CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE USER REGARDING THE USE
AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE
IMPLEMENTATION OF ANY OF THE IDEAS INDICATED HEREIN. SHOULD YOU HAVE QUESTIONS REGARDING THIS
MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT
Copyright
Harold S. Small 2007. All rights reserved.