Update on State Tax Treatment of 5-Year Carryback of 2008 and 2009 Net Operating Losses
The calculation of North Carolina taxable income begins with federal taxable income as defined under the Internal Revenue Code (“Code”). State law defines the Code as the Code enacted as of a certain date. When our State law’s reference date to the Code is updated each year, that change conforms North Carolina law to federal law that has been enacted as of that date, except for any items for which specific adjustments are required by State law.
Senate Bill 202, signed into law by Governor Perdue on August 9, 2009, updated our reference to the Code enacted as of May 1, 2009. Therefore, North Carolina law adopted the federal five-year net operating loss (NOL) carry back provision for 2008 NOLs that was enacted on February 17, 2009 by the American Recovery and Reinvestment Act (ARRA), P.L. 111-5. Under the ARRA provision, an Eligible Small Business (ESB), as defined by section 172(b)(1)(H) of the Code, could elect to carry back an NOL from tax year 2008 for three, four, or five years, rather than the standard two years. Additional information is available regarding an ESB under Rev. Proc. 2009-26.
On November 6, 2009 (subsequent to our update to the Code of May 1, 2009), President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA). This law modified the ARRA by allowing businesses of every size to carry back 2008 or 2009 NOLs for up to five years, but with a 50 percent of federal taxable income limit on NOL offsets in the fifth year, and 100 percent of all income in the remaining four carry back years. The expanded election under the WHBAA is available for NOLs incurred in either 2008 or 2009, but not for both years. However, there is an exception for an ESB. An ESB that elected to carry back their 2008 NOL under the ARRA may also make the election available under the WHBAA for a 2009 NOL, enabling the ESB to carry back NOLs from both 2008 and 2009 for up to five years.
Senate Bill 897, signed into law by Governor Perdue on June 30, 2010, updates our reference to the Code to May 1, 2010. Therefore, a taxpayer is required to carry back an NOL to the same tax year(s) for federal and State individual income tax purposes. However, SB 897 also requires certain adjustments to federal taxable income. Under G.S. 105-134.6(d)(7), a taxpayer is required to add to federal taxable income the amount of any 2008 or 2009 NOL claimed under the WHBAA beyond the standard two-year period. However, no addition is required for the portion of the NOL that is attributable to an ESB as defined by section 172(b)(1)(H) of the Code.
For State purposes, if a portion of your 2008 or 2009 NOL is attributable to an ESB, that portion should be considered absorbed first. An addition is required for the portion of the NOL that is not attributable to the ESB and is carried back beyond the standard two year period. For example, if you incurred an NOL in tax year 2008 of $50,000 ($30,000 from an ESB and $20,000 from sources other than an ESB) and you carried this 2008 NOL to tax year 2003, which was absorbed in full for federal purposes in that tax year, an addition of $20,000 is required on the 2003 State return.
North Carolina provides relief in the same tax year to individuals who incurred an NOL in tax years 2008 or 2009 resulting from an ESB loss as the relief received at the federal level. However, for the portion of an individual's 2008 or 2009 NOL that is not attributable to an ESB, relief is provided in future tax years pursuant to G.S. 105-134.6(d)(8). For those individuals who made the addition under G.S. 105-134.6(d)(7), a deduction of one-third of the 2008 NOL absorbed on the 2003, 2004, and 2005 federal returns or the 2009 NOL absorbed on the 2004, 2005, and 2006 federal returns is allowed in tax years 2011, 2012, and 2013.
All taxpayers who have previously filed amended returns under the provisions of the WHBAA claiming carrybacks of 2008 NOLs to tax years 2003, 2004, and/or 2005, and those who have filed amended returns claiming carrybacks of 2009 NOLs to tax years 2004, 2005, and/or 2006, will be contacted by the Department for additional information. Taxpayers who have not yet filed amended returns claiming an NOL under the WHBAA, must include a statement on the amended State return when filed identifying to which tax years the NOL was carried for federal and State purposes, and a copy of federal Form 1045 with Schedules A and B used for federal purposes. Also, please note the portion of the NOL attributable to the income, gain, loss, or deduction of an ESB. Write either “All ESB,” “Partial ESB,” or “No ESB” in the top center of the amended return.
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