Summary
On Thursday, Congress sent a bill to the White House containing enhanced net operating loss (NOL) carryback opportunities for most companies. The bill contains a provision extending the NOL carryback period from two years to five years for losses incurred in 2008 or 2009. President Obama is expected to sign the bill on Friday which would result in the immediate filing for refunds by many companies.
Analysis
On Thursday, the Senate and House agreed to a bill containing expanded NOL carryback provisions. The bill, The Worker, Homeownership, and Business Assistance Act of 2009, is expected to be signed by the President on Friday.
The legislation provides for a five year carryback period (previously two years) for losses incurred in 2008 or 2009, but not both. The provision will allow companies that we're previously limited as to their carrybacks to tap into earnings going as far back as 2003 and thereafter; very profitable years for many companies (e.g., homebuilders, etc.). The election is not available for companies that received TARP assistance. Most companies have already filed their 2008 tax returns and will have the opportunity to file refund claims almost immediately.
Under the two year carryback provision, many companies eligible carryback losses exceeded their taxable income in the two preceding carryback years; as a result, the excess losses provided no immediate tax benefit and had to be carried forward instead. Furthermore, for financial reporting purposes, the provision will allow many companies to immediately recognize previously deferred NOL tax benefits in 2009 earnings, thus providing both a cash flow and EPS benefit. Under the two year carryback provision, many companies were required to record a valuation allowance (i.e., a reserve) against the NOL deferred tax asset.
The legislation provides for a five year carryback period (previously two years) for losses incurred in 2008 or 2009, but not both. The provision will allow companies that we're previously limited as to their carrybacks to tap into earnings going as far back as 2003 and thereafter; very profitable years for many companies (e.g., homebuilders, etc.). The election is not available for companies that received TARP assistance. Most companies have already filed their 2008 tax returns and will have the opportunity to file refund claims almost immediately.
Under the two year carryback provision, many companies eligible carryback losses exceeded their taxable income in the two preceding carryback years; as a result, the excess losses provided no immediate tax benefit and had to be carried forward instead. Furthermore, for financial reporting purposes, the provision will allow many companies to immediately recognize previously deferred NOL tax benefits in 2009 earnings, thus providing both a cash flow and EPS benefit. Under the two year carryback provision, many companies were required to record a valuation allowance (i.e., a reserve) against the NOL deferred tax asset.
Thomas Klein, CPA consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
