A new law signed by the president on November 6th may turn business losses into gains for hundreds of struggling companies across Illinois. The government is counting on businesses taking advantage of an expansion of the American Recovery and Reinvestment Act (ARRA) that could pump millions of dollars into the still-sagging economy.

In a major upgrade to what was already an exceptional tax benefit, the expanded net operating loss (NOL) carryback provision of ARRA is now available to virtually any business that experiences NOLs in 2008 or 2009. The result: businesses that were once excluded from claiming the tax relief may now be able to file for a refund of taxes paid in previous years.

Previously, the expanded carryback eligibility ceiling had been reserved for companies with $15 million or less in gross revenues. Now all companies, large and small, can carry back NOLs for three, four or five years, rather than the standard two years.

Losses in the last two years can be fully deducted from income in the four previous years, with a 50-percent income limit on NOL offsets in the fifth year.

Here’s an example of how it might work: ABC Inc. had profits of $25 million in each year from 2004 to 2008. But ABC was hit hard by the recession in 2009, suffering a net operating loss of $50 million. The new law allows ABC to carry back the 2009 NOL to 2004 and subsequent years. For 2004, ABC can claim an NOL deduction of 50 percent of its 2004 taxable income, or $12.5 million. The balance of $37.5 million can be used to fully offset the 2005 income of $25 million. That leaves $12.5 million that can be deducted against 2006 income.

Such substantial reductions in income can produce millions in refunds of taxes already paid in those previous years. How much is refunded depends on many other factors, but even modest refunds will be welcomed by cash-strapped businesses.

If a business anticipates a net operating loss for 2009, now is the time to talk to a tax professional about how to take advantage of the enhanced NOL rules. Keep in mind, these rules only apply to losses in the 2008 and 2009 tax years. Once the taxpayer elects to take advantage of the law’s new NOL provisions, the election cannot be changed.

The way it stands now, the previous two-year carryback limit will return for NOLs in 2010. In addition, it should be noted that Illinois tax law does not allow the carryback of an NOL, so this incentive is only available for federal purposes.

Even though a full economic recovery may still be off on the horizon, there is a chance for at least temporary relief from taxes. For those businesses that qualify, the sooner an amended tax return is filed, the sooner any refund will be received. iBi

Joe Glawe is a partner in the Peoria office of Clifton Gunderson and the
tax leader for the Downstate Illinois Client Service Center. He can be reached at (309) 671-4500 or Joe.Glawe@cliftoncpa.com.