US Senate Bill To Expand Loss Carry Back

by Leroy Baker, Tax-News.com, New York

04 November 2009

Legislation has been introduced in the United States Senate that would allow companies of all sizes to take advantage of the more generous loss carryback rules introduced by the 2009 Recovery Act.

Forming part of the Worker, Homeownership and Business Assistance Act of 2009, introduced by Senators Max Baucus (D-MT) and Harry Reid (D-NV) on October 29, the proposals would permit any company to carry back losses incurred in either 2008 or 2009 against income earned in any of the five prior years, limited to 50% of the taxpayer’s income in the fifth year.

The provision reflects legislation introduced by Baucus and Sen. Olympia Snowe (R-ME) earlier this year.

“This bill will provide real tax relief to recession-worn companies by allowing them to offset their losses against taxes paid in earlier years," commented Baucus, continuing: "This allows businesses to recoup the funds they need to make payroll and meet expenses to retain and create jobs."

Under current rules, net operating losses may generally be carried back for two years. The American Recovery and Reinvestment Act of 2009 (ARRA), extended the net operating loss carryback period from two to five years for tax years beginning in or ending in 2008 for small businesses with gross receipts of USD15m or less.

The new proposal would allow all businesses to carry back net operating losses for up to five years for losses incurred either in 2008 or 2009 - but not both - at the election of the taxpayer. Businesses would be able to offset 50% of the available income from the fifth year and 100% of all income in the remaining four carryback years.

Small businesses which have already elected to carry back 2008 losses under the ARRA may also elect to carry back losses from 2009 under the new proposals.

It is estimated that this provision would cost USD10.4bn over ten years. However, this, and other tax breaks in the legislation, would be offset by a delay in the introduction of the worldwide allocation of interest rules, which are intended to provide companies with an election to take advantage of a rule for allocating interest expense between United States sources and foreign sources for purposes of determining a taxpayer’s foreign tax credit limitation.

Originally scheduled to come into force for tax years beginning after 2008, the new bill proposes a delay until 2018. This will raise an estimated USD20bn over 10 years.

In addition, the bill would increase the penalty for failure to file a partnership or S corporation return by USD106 to USD195 for tax years beginning after 2010. This would raise an estimated USD1.2bn over 10 years.

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