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2010 Budget Tax Proposal

Expand net operating loss carryback

Businesses calculate taxable income by subtracting expenses from revenues. Although net income is taxed immediately, net operating losses (NOLs) do not qualify for immediate refunds on current tax returns. Businesses, however, may “carry back” losses to offset profits from the previous two years and may carry forward losses for twenty years and deduct them against future profits.  Firms do not receive interest on their loss carryovers, however, so their present value is less than if firms could claim them immediately).

The economic stimulus act (“American Recovery and Reinvestment Act of 2009”) increased the NOL carry-back period to five years for NOLs incurred in 2008. The extension applied, however, only to small businesses–those with gross receipts of $15 million or less.

The Administration plans to work with the Congress to make a lengthened NOL carryback period available to more taxpayers. Both the Senate and House stimulus bills would have extended the increased carryback period to more firms. The Senate would have allowed all businesses to use the five-year period, except for Fannie Mae, Freddie Mac and firms that received money from the Troubled Assets Relief Program. The House bill covered the same firms as the Senate bill, but also required that businesses using the extended carryback period permanently reduce their NOLs by 10 percent. The administration’s revenue estimate suggests that the proposal would match the Senate’s stimulus provision. If measured over the ten year budget period, 2010-2019, the proposal would raise an estimated $9.3 million over 10 years. This is because the revenue losses occur in 2009 and 2010 when losses are claimed. The resulting reduction in the stock of losses that firms could deduct from future profits yield revenue gains in later years. Measured over the years 2009 through 2019, the proposal costs $19 billion in foregone revenues.

Increasing the carry-back period is arguably good tax policy. By not providing full refunds for losses, current law discriminates against risky investments relative to safe ones and places taxable corporations at a disadvantage compared with businesses taxed as flow through enterprises, whose owners can deduct business losses against other income. In addition, corporations with current losses, unlike profitable corporations and non-corporate businesses, cannot make full use of investment incentives, such as the recently enacted bonus depreciation proposal.  Allowing full and immediate refunds of losses would level the playing field between loss corporations and profitable corporations and between taxable corporations and businesses taxed as flow through enterprises. But some business losses reflect the use of tax preferences and not real economic losses; limiting current deductibility of losses is an indirect way of paring back these tax preferences.

Additional Resources
Stimulus Act Report Card: Five-Year Carryback of Net Operating Losses
Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part Two: Business Tax Provisions (JCS-3-09), Joint Committee on Taxation, September 2009, pp 25-29