Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

New Net Operating Loss Rules Benefit Larger Business - First Time Homebuyer Credit Extended and Expanded

On November 6, President Obama signed the “Worker, Homeownership, and Business Assistance Act of 2009.” The bill, expected to cost about $24 billion, was originally intended to extend unemployment benefits. While that provision is still part of the bill, the bill is receiving more attention with respect to certain additional stimulus provisions.

The new law allows most (but not all) businesses, regardless of revenues, an expanded net operating loss carry-back provision. Another well publicized provision was an extension of the $8,000 first-time homebuyers credit for the purchase of a home prior to May 1, 2010 (and in some cases July 1, 2010.) There is also a new $6,500 homebuyer credit provision for existing homeowners.  In addition, there is an increase in the penalty for failure to file both S-corporation and partnership income tax returns timely. Another provision requires most tax preparers to efile all individual and estate and trust returns beginning in 2011.

Net Operating Loss (NOL)
The Worker, Homeownership, and Business Assistance Act provides an election for most taxpayers (not just small businesses) to increase the carry-back period for an applicable NOL from 2 years to 3, 4, or 5 years. An applicable NOL is defined as a taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. There are special limited rules for life insurance companies, and businesses in which the federal government has acquired an equity interest are often excluded.  Under prior law, small businesses were defined as those with less than $15 million in average annual revenue (click here for a more detailed explanation from a previous article.)

Generally, the election may be made for either the 2008 or 2009 tax year. However, certain eligible small businesses that have already elected to carry-back a loss 3, 4 or 5 years may also make an election for their 2009 tax year. Businesses with losses in 2008 that were not an eligible small business may have an opportunity to carry that loss back five years rather than waiting until the 2009 year is complete. Once Treasury provides some guidance with respect to the new law, your Blackman Kallick representative can assist you in determining potential refunds available.

One difference between the prior small business net operating loss carry-back rules and this new provision deals with the 5th year carry-back provisions.  The amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer's taxable income for that 5th preceding tax year determined without any NOL for the loss year or for any tax year after the loss year. For all others years, the net operating loss may offset 100% of the remaining taxable income in the carry back year.

One other difference: the Act suspends the 90% limitation on the use of any Alternative Tax net operating loss deduction. Without this provision, many large taxpayers find their refund to be limited by an unexpected alternative minimum tax liability.

First-time Homebuyer Credit Extended; Existing Home Owners May Qualify for $6,500 Credit
As part of the Act, the first time homebuyer credit (initially set to expire on November 30, 2009) has been extended through April 30, 2010.  The credit, which is available on the purchase of a principal residence only, is equal to the lesser of $8,000 or 10% of the purchase price.  The credit is now available to higher income taxpayers and is phased out with adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers.) Also, the taxpayer will qualify if they enter into a binding contract prior to May 1, 2010 and close on the transaction prior to July 1, 2010. 

In addition to the first time homebuyers credit, the Act also allows a homebuyers credit for “long-time residents.”  This credit is available to any individual who has maintained the same principal residence for five consecutive years during the eight year period ending on the date of the purchase of the new principal residence. The maximum allowable credit for such individuals is $6,500. The same income phase-out provision applies for this credit, therefore, many higher income taxpayers will not receive the benefit.

Neither credit is available if the purchase price of the residence exceeds $800,000.  This limitation is effective for residences purchased after November 6, 2009. Also, taxpayers may elect to treat a residence purchased after 2008 as made on December 31 of the prior year (amended returns then may be filed to receive the refund more quickly.)

Increased Penalty for Failure to File S Corporation or Partnership Returns
The monthly penalty for failure to file an S-Corporation or Partnership return on time has been increased to $195 per partner or shareholder per month or partial month late. For widely owned S-corporations and Partnerships, this can add up very quickly.  Revenue projections due to the increased penalty were over $1 billion.

Electronic Filing Required of Most Return Preparers
In an effort to decrease administrative costs of the Internal Revenue Service, the bill requires most return preparers to file all individual and estate and trust returns electronically.  This provision is effective for returns filed after December 31, 2010.

We will have additional information as it becomes available.  The above represents the highlights of the bill.  Please contact Brian Carter at 312.980.2994, Michael Calahan at 312.980.2996 or your Blackman Kallick representative for more information.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.