The I.R.S. permits businesses who have a net operating loss in one year to carry back that capital loss to previous years of profit, in order to offset the profit with the loss and receive a tax refund for the previous years.
A new tax provision under the stimulus act extends the operating loss carry back period to five years from the usual two years. Here is a quick example of how the tax loss carry back provision works:
Let's say your business had a loss of $28,000 in 2008. But you had profits of $12,000 in 2007, $8,000 in 2006, $10,000 in 2005 and $13,000 in 2004. In the past, the IRS has only allowed you to go back two years to offset the loss and get refunds for the profits in those years. So, previously, you would only have received refunds for 2007 and 2006. Now, the IRS is allowing you to go back as many as five years to get refunds. In the case above, you would be able to use an additional $8,000 of loss in 2008 to offset $8,000 of your profits in 2005.
How and When to File
A corporation that operates on a calendar-year basis must file a claim by Sept. 15, 2009. For eligible individuals, including those who file as sole proprietors on Schedule C, the deadline is Oct. 15, 2009. To accommodate the change in tax law, the IRS has updated the instructions for Form 1045 and Form 1139, which small businesses will use to take advantage of the carry back provision.
The IRS has published an FAQ document that might answer some of your questions. If you think you might be eligible for this provision to get refunds in previous years, talk to your CPA or tax preparer.
