Proposed Legislation on Net Operating Losses

As you may know, Congress is expected to consider a new economic stimulus package over the next month, with plans to have legislation that President-Elect Obama can sign quickly after his inauguration. Congress is currently discussing various proposals to attach to this stimulus package. Recently, Congress has begun considering an idea that would benefit all types of businesses – including those in real estate and construction. Senator Orrin Hatch, R-Utah, a senior member of the Senate Finance Committee, presented a letter to the leaders of the Committee on Tuesday, December 16. In this letter, Hatch proposed that the net operating loss (NOL) carryback period be extended. Currently, NOL’s can only be carried back two years and carried forward twenty years. It is highly preferable for businesses to carry back losses, since losses result in immediate tax benefits. However, in difficult times such as these, many businesses may not have income in the past two years to offset with NOL carrybacks. This forces them to carry forward losses. These businesses may have losses in subsequent years, causing the NOL’s to be carried forward many years into the future and delaying their tax benefits.

Senator Hatch has proposed that Congress increase the carryback period to at least ten years, and perhaps as many as fifteen years, effective beginning in the 2008 tax year. He also has suggested that this become a permanent feature of U.S. tax law. It might prove difficult for Hatch to make the extended carryback period a permanent feature of the law, but even if the extended period is only effective for a few tax years beginning in 2008, it still would help businesses survive the current economic downturn. Senator Hatch states, “The economic stimulative effect of such a change would be tremendous. It would make much more potential quick cash available to millions of companies that are currently losing money.” The cash would be available within a few weeks of the date that each business filed its NOL carryback claim.

As of now, it is unclear if Hatch intended his proposal to apply solely to corporate taxpayers or to non-corporate taxpayers as well. It is vital that this proposal apply to non-corporate taxpayers as well as corporate taxpayers, since many real estate and construction businesses are taxed as pass-through entities. The NOL’s will ultimately pass through to individuals, so it is important for these individuals to be able to carry back the losses. This proposal must be passed effective for the 2008 tax year and beyond, as immediate tax relief is necessary.

If Congress extends the carryback period for all businesses, real estate and construction businesses are sure to benefit. In our current real estate market, it is imperative that real estate and construction businesses receive some form of tax relief. Therefore, I strongly encourage you to contact your state representatives and express your support of Senator Orrin Hatch’s proposal.

Please contact me via phone at (404) 420-5670 or via email at ptuley@pkm.com if you have any questions or concerns.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contact Adam Polakov at apolakov@pkm.com or Arvil Stanford at astanford@pkm.com or visit www.pkm.com.