Time is running out to retroactively create a 2009 tax loss eligible to be carried back up to five years for a refund of federal income tax paid in the prior years.
This past November, Congress amended the Internal Revenue Code to allow 2009 business tax losses to be carried back up to five years. In other words, you can use a 2009 business loss to offset income in one of the preceding five years, and receive a cash refund from the Internal Revenue Service for the prior year’s tax. Although it is now 2010, the opportunity to create a 2009 tax loss—and receive a refund of prior year taxes–has not passed for everyone.
The Internal Revenue Code permits some taxpayers who hold property in a corporation to trigger a tax loss by restructuring the corporation. The restructuring does not require changing the beneficial ownership of the property. Instead, it takes advantage of an exception to the usual rules requiring a sale to an unrelated person to trigger a tax loss. The Internal Revenue Service agrees the exception exists, even though the beneficial ownership of the property does not change.
Even though it is now 2010, for some taxpayers there remains an opportunity to retroactively create a 2009 loss that will be eligible for the five-year carryback. The following are some of the particular parameters which are usually necessary for a calendar-year taxpayer to create a retroactive 2009 tax loss eligible for the 2009 five-year net operating loss carryback even though it is now 2010:
- The property is held by an entity treated as a corporation for income tax purposes, but the entity is not a corporation under state law. For example, the property may be owned by a limited liability company or limited partnership that filed a “check-the-box” election with the Internal Revenue Service to be treated as a corporation for income tax purposes.
- The loss must be an ordinary business loss, not a capital loss. Generally, property used in a business for more than one year (such as an apartment building or office building) and inventory (including lots or condominiums held by a developer or dealer in real estate) will qualify for an ordinary loss.
- The income tax basis in the property (generally, the original purchase price, minus depreciation deductions) must be greater than the current fair market value.
- The income tax basis must be greater than the amount of corporate indebtedness.
- The restructuring occurs on March 15, 2010, or sooner. It must actually occur on or before that date, and cannot occur retroactively after that date.
For persons who hold built-in loss property in a corporation, but do not fit all of of these criteria, there may still be opportunities to create 2010 tax losses, which under current law can be used to offset taxable income in 2008 or 2009, or up to twenty years into the future.
CIRCULAR 230 DISCLOSURE: This article does not fully describe all of the factors relevant to the subject matter. To comply with Treasury Department Regulations, we advise you that any federal tax advice contained in this article cannot be used for the purpose of (i) avoiding penalties imposed by the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein.