Many taxpayers find the ability to carry back a net operating loss (NOL) one of the most business-friendly provisions in the Tax Code. This is often true for new businesses. In times of economic difficulty, Congress has even relaxed the net operating loss carryback rules. However, there may be times when it is tax-advantaged not to carry back an NOL.
An NOL arises when allowed deductions exceed a taxpayer’s gross income for a tax year. An NOL can be generated from business activity losses as a sole proprietor or partner in a partnership, among other activities. The rules for NOLs differ for different types of business structures. Generally, taxpayers can carry back an NOL for two years and then carry it forward for 20 years.
The decision not to carry back an NOL can be influenced by a variety of factors. These include the tax rates that may have been applicable to the years in which the NOL would be carried back. Taxpayers also need to consider the impact that an NOL would have on deductions, exemptions and credits. Taxpayers may also need to weigh the benefits of carrying back an NOL against the benefits of carryovers for other deductions.
The election not to carry back an NOL is made by attaching a statement to a timely filed (including extensions) return for the year in which the NOL arose. The election must state that it is made under Code Sec. 172 and provide sufficient information to identify the election, the period to which it applies and the taxpayer’s basis or entitlement for the election.
The tax rules do not allow taxpayers to relinquish a portion of an NOL. The election must be to forgo the entire NOL. However, in certain limited cases, such as farming losses, there is some flexibility in the rules. The election also must relinquish the entire carryback period.
Once made, the election to relinquish an NOL carryback cannot be revoked without the permission of the IRS. However, there have been exceptions such as under the Worker, Homeownership and Business Assistance Act of 2009, which allowed taxpayers to revoke a previously made election not to carryback an NOL in order to take advantage of an extended carryback period under that law.