Where’s the Cash? Look Behind You

A new law gives corporations a chance to apply net operating losses to income generated in good years, going back to 2003.

There’s something for everyone in the aptly named Worker, Homeownership, and Business Assistance Act of 2009, an economic-recovery package signed into law last Friday. The statute, which garnered bipartisan support, provides added unemployment insurance for those who have been out of work the longest and expands the existing homebuyer credit. CFOs, however, might be more interested in the new law’s extension of a small-business tax benefit for another year and the fact that it opens the program up to midsize and large businesses.

Specifically, the law increases the net operating loss (NOL) carryback provision from two years to five years for corporate losses incurred in 2008 and 2009. That means losses from those two years can be used to offset taxable income paid in the prior five years, thereby providing corporate taxpayers with a cash refund.

Corporations are coveting NOLs (meaning losses for accounting purposes alone, of course) and are going to great lengths to preserve them. For instance, this year both Ford Motor Co. and Citigroup adopted so-called poison pills to prevent a technical change of ownership that would have triggered the loss of $19 billion and $44 billion worth of NOLs, respectively.

“The expansion of the NOL carryback period will accelerate a $33 billion refund of previously paid taxes for much of Corporate America in a very short period of time,” says John McMahon, director for business tax services at Ernst & Young. The new carryback provision includes the highest corporate profit years in the nation’s history — those generated in 2005 and 2006 (an aggregate $3.5 trillion before taxes), he says. The $33 billion represents the total NOLs that companies will likely claim under the newest law.

The provision enables companies to take NOLs from one of the designated years, either calendar or fiscal 2008 or 2009, and apply those losses to taxable income going back as far as 2003 or 2004, respectively. That results in lower taxable income for the prior year, which allows the company to recalculate its tax bill and collect a refund from the government. The ability to “recover cash taxes” will help companies — especially those in such hard-hit sectors as retail, real estate, and manufacturing — sustain business operations and make investments during uncertain economic times, contends McMahon.

The new carryback provision is similar to the small-business provision contained in the sweeping stimulus package passed in February. The earlier law allowed companies with $15 million or less in annual revenues to extend their NOL carryback period from two years to five years. Small businesses that have already used the five-year carryback provision may take advantage of the new rule, provided they don’t double-dip into NOLs from the same year. That is, if a small business has already applied NOLs from 2008 to a prior taxable year, it is only eligible to use 2009 losses under the recently passed law.

The only companies banned from taking advantage of the new law are those that accepted government bailout money, says tax expert Robert Willens, who heads an eponymous consultancy in New York. Willens explains that the five-year NOL carryback doesn’t apply to corporations that allowed the government to buy company stock or warrants in exchange for cash as part of the Troubled Asset Relief Program — even if the company has since repaid the funds. “TARP beneficiaries were singled out for punishment” with regard to the extended carryback period, he adds.

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