Net Operating Losses: Proposed Extension of Carryback Period

THE REPORT: Net Operating Losses: Proposed Extension of Carryback Period
LOCATION: RL34535


What do you Learn: With the American Economy in a deep slowdown, congress is examining the tax code on how businesses are reporting their losses so as to reduce their volatility in business cycles. One way this is done through the Net Operating Loss (NOI) carryback/carryforward provisions. Previously if a business has a loss they can carry back the loss for two years or add it to the next twenty years of tax returns. Generally, taxpayers wish to carry their losses backward because they can receive a refund. If the loss is incurred from causality, theft, or a Presidentially declared disaster then you can carry the loss back for three years. Farming is a five year carryback period for losses with Real Estate Investment Trusts are ineligible.

In the current Congress both American Recovery and Reinvestment Act and the recently passed new Worker, Homeownership, and Business Assistance Act P.L. 111-92 extend NOI's that were incurred in 2008 or 2009 (but not both) back to five years. Extending the provision another three years from the norm. On the fith year the loss is capped at 50% of the taxpayer's taxable income but this limitation does not apply to many small businesses.

Policywise, the report estimates that by making this change from the two to a five year carryback period the cost will be about $10.4 billion and according to the Congressional Budget Office produces a stimulus increase to the GDP for every $1 of NOI carryback there is up to a $0.40. The same rate does net more with targeted income tax cuts and government purchases.

However, with those benefits policymakers must wrestle with the "moral hazard" of their decision because economists note that it does cause investors to make much more risky investments and reduced revenue in to the treasury. Thus the conundrum in changing the carry back provision.