Turn business loss into cash…but hurry!

What changed?
The new Stimulus Bill legislation that was signed into law on November 6, 2009 allows businesses of all sizes to carry back losses in 2008 or 2009 for five years. Previously the carry back provision was restricted to losses in 2008 and corporations with annual revenues of $15 million or less.

Congress expanded the ability for businesses to apply net operating losses (NOLs) against taxes paid on profits during the previous five years. Normally business can carry back net operating losses for only two years.

The change is a good move by the Federal Government. However, it comes too late in the 2008 tax year to be of the greatest help unless some miracle of timing is achieved on all sides.

Businesses that have lost money in the past couple of years but were profitable in previous years have the most to gain.

Retailers, manufacturers and homebuilders have been tagged as amongst those that will find this change particularly useful.

Retailers, Manufacturers and Homebuilders.
Retailers need cash to finance inventory for the Holiday Season otherwise that are forced to close stores or even go out of business. Unfortunately, most small retailers have already paid and taken delivery of the Holiday Season inventory. However, they may be some retailers where a miracle of timing will afford them to get a refund to pay for additional 2009 inventories.

Most manufacturers were too large to qualify for the Stimulus Bill’s carryback provision. Now they will qualify for the break, which is said to be urgently needed. “More than 20% of small business and medium sized National Association of Manufacturing (NAM) members reported NOLs in 2008 and we expect that number to double in 2009” says an official at NAM.

Homebuilders could generate a flurry of land sales before the end of the year to allow them to sell land in a market where housing prices have not recovered and get a tax refund on the loss. They can then use the money to build on land they own where housing is on the upswing. They must move fast!

How it works.
Businesses that use the provision would first apply current losses to profits made five years ago. They are allowed to offset only 50% of taxable income for that year. Any remaining losses would then be applied to profits made four years ago then the three years and so on. Losses carried over to these years can offset 100% of taxable income. See IRS Form 1139 for corporations and IRS Form 1045 for individuals, trusts and estates.