New Rules for Net Operating Loss Carrybacks

“Small” sole proprietors (those with average annual gross receipts under $15 million in the prior 3 years) who had a net operating loss (NOL) in a tax year beginning or ending in 2008 can opt to carry the loss back 3, 4, or 5 years instead of the usual 2-year carryback. The election is irrevocable, so make sure you choose the best carryback period possible for your tax situation.

Time for Making the Election

Those who have already filed 2008 returns. You have until the later of 6 months after the due date of the return (without any extension) or April 17, 2009, to make the election. Anyone who had elected to waive the 2-year carryback (so the NOL would only be carried forward) can revoke the election and choose the 3-, 4-, or 5-year carryback as long as this is done by April 17, 2009.

Those who have not yet filed 2008 returns. You have until the extended due date of your return to make the election. For example, if you obtain a 6-month filing extension, you have until October 15, 2009, to file your 2008 return and make the election.

How to Make the Election

Attach a statement to the return saying you are electing the 3-, 4-, or 5-year carryback period. If you have a fiscal year beginning in 2008, include this information in your election statement.

Then, to obtain the refund from claiming the carryback, file Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Income Tax Return. Across the top of the form, write “2008 NOL Carryback Election Pursuant to Rev. Proc. 2009-19.”

Source: Rev. Proc. 2009-19, IRB 2009-14