The I.R.S. permits eligible small 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, for eligible small businesses.
An "eligible small business," for this purpose, is a corporation or partnership that meets the gross receipts test of Internal Revenue Code Sec. 448(c) for the tax year of the loss (using $15 million instead of $5 million), or a sole proprietorship that would meet that test if the proprietorship were a corporation. In other words, a business is eligible if it conducted business as a corporation, partnership, or sole proprietorship and if its average annual gross receipts, as modified for the three years ending with the tax year before the year of the loss are $15 million or less.
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 Form 1045 instructions and Form 1139 instructions, which small businesses will use to take advantage of the carry back provision.
IRS Publication 536might 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.