The November 2009 extension has a few other restrictions. For example, companies that received bailout money under the government’s Troubled Asset Relief Program are ineligible to use the NOL extension. “TARP beneficiaries were singled out for punishment” with regard to the extended carryback period, says Robert Willens, a tax expert who heads tax advisory service Robert Willens LLC.
Another twist: if a company elects to look back to the fifth taxable year, NOLs can be used to offset only 50% of the taxable income earned that year, notes David Culp, a senior manager with KPMG. If NOLs remain after offsetting the fifth year’s income, then the company is permitted to apply the leftover NOLs to year four, three, and so on, until the offset is used up.
The fifth-year “haircut” was probably included to allay any congressional budget concerns, explains Darrell Poplock, a tax partner at PricewaterhouseCoopers, who says the new carryback provision is expected to cost the U.S. Treasury $10.4 billion over 10 years. According to the White House, however, the NOL portion of the bill is being paid for by several other measures, including a delay until 2018 of a tax break for corporations that involves interest allocation, an increase in penalties for failure to file S corporation and partnership tax returns, and a temporary increase in corporate estimated tax payments due to be paid from July to September 2014.
Cash in Hand
Credit Suisse calculates that the carryback extension increased the pool of taxes eligible for refund for S&P 500 companies by $270 billion for 2008, and by $338 billion for 2009 NOLs. The health-care industry appears to be the sector with the highest refund potential, says Credit Suisse, which estimates the industry could claim a total of $1.5 billion in refunds based on 2008 NOLs (see “Money in the Bank,” above). Information-technology and energy companies are next in line, with possible refunds totaling $940 million and $766 million, respectively. Financial companies that didn’t take TARP funds have the fourth highest refund pool for 2008, at $514 million.
But report co-author Christopher Cornett, a Credit Suisse equity analyst, warns against overstating the rule’s impact on company valuations. “When the rule change was announced, a lot of people thought this was a dollar-for-dollar increase in the enterprise value of a company. It is not.” Cornett explains that the real benefit of the tax change is having the cash today, versus having to wait for the company to start generating profits again before claiming an NOL refund in the future.
He says the immediate cash infusion may help reduce uncertainty among companies currently suffering from liquidity problems. Indeed, a better cash position could lower the market’s perception of risk and, in turn, increase a company’s valuation.
The IRS has made filing for the refund easy, saying firms can make a claim on their tax return for the NOL year, amend prior returns, or file a “quick” carryback claim. But companies still face two complicated, if basic, questions: Which year’s NOL should they carry back, and how far back should they carry it?