Tax planning for NOLs in the carryback maze.

• Author: Smith, Annette B.
• Position: Net operating losses

In light of the recently enacted, temporary five-year net operating loss (NOL) carryback period, taxpayers have the opportunity to plan for which year(s) an NOL will be used to offset income. To maximize their NOL benefits, taxpayers should analyze their past, current and projected tax positions for the tax years to which an NOL may be carried.

This analysis involves determining both the income years for which the NOL may be used and also its effects on various tax attributes (e.g., credits and charitable contributions) and various potential limits (e.g., corporate equity reduction transaction (CERT), separate return limitation year (SRLY) and Sec. 382) in years NOLs are used. Without a comprehensive analysis, a taxpayer might fail to elect to forgo an NOL carryback period--unaware that absent an election, the carryback will free up credits that may never be used, or use of the NOL may be limited. In these situations, a perceived benefit of the carryback will be decreased or lost.

Background

Under Sec. 172, NOLs generated in a tax year can be deducted from net taxable income in previous years (to receive a refund), or in future years (to reduce tax due in future years) or in both. NOLs must be carried back to the earliest available tax year (various carryback periods apply) to reduce income in those years, and then carried forward for 20 years until the NOL is fully used by reducing income in the years to which it is carried. However, the taxpayer can elect to forgo a carryback period. If an NOL is not used by the end of the twentieth tax year, it expires.

Various carryback periods may apply to a taxpayer. If a taxpayer qualifies for one or more of the carryback periods, unless it elects to forgo the carryback, it must carry back the NOL to the earliest tax year available to it.

Carryback Options

Two-year. The general two-year carryback period applies to taxpayers that do not have NOLs that qualify for any of the longer carryback periods or have elected to forgo those periods. To forgo the two-year carryback period, a taxpayer must make an election on a timely filed (including extensions) return for the tax year in which the NOL arose.

Three-year. A three-year carryback period applies to taxpayers with "eligible losses" generated during a tax year. Eligible losses are defined as (1) for individual taxpayers, losses of property arising from fire, storm, shipwreck or other casualty, or from theft and (2) NOLs of small-business taxpayers and...