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Business Costs & Regulation

Tax Law Change Means Cash for Cos.

It’s Christmas in November for money losing businesses, which will see cash in their stockings, thanks to a new law OK’d by Congress.

Businesses large and small that have suffered losses during the economic downturn got an early Christmas present from Congress: A law signed by President Obama on Nov. 6 allows them to use losses from 2008 and 2009 to offset profits as far back as 2003. That means they can claim a refund for income taxes paid on the earlier profits. Lawmakers decided this injection of capital was a good way to boost the economy, hopefully spurring production and hiring.

Manufacturers are giving the new law a big thumbs-up. Around 40% of all U.S. small and midsize companies are expected to post net operating losses in 2009, twice the number that reported losses last year, according to the National Association of Manufacturers (NAM), so look for billions of dollars to flow to firms claiming refunds. Manufacturers will use the cash to finance ongoing operations and retain jobs, NAM says.

Retailers say the tax relief comes at a crucial time because the promise of a refund will make it easier to get financing during the crucial fourth quarter, which accounts for between 25% and 50% of most retailers’ annual sales. The financing will help stores stock shelves for the holidays and let them do more seasonal hiring, according to the National Retail Federation.

Normally, businesses can carry back their net operating losses for up to only two years. Back in February, Congress OK’d legislation allowing losses to be carried back for up to five years, but only for companies with $15 million or less in average annual receipts over the years 2006 through 2008, and only on losses that businesses incurred in 2008. The newly enacted law allows the five-year carryback for companies of all sizes and applies to both 2008 and 2009 losses.


Congress added a wrinkle, however, for companies with more than $15 million in average annual receipts for 2006-2008: In situations where a company is carrying a loss back the full five years, the carryback loss can offset only 50% of income from the fifth year. For example, say your firm had a $1-million loss in 2008, and the last time it made a profit was in 2003, when its taxable income was $500,000. You would be able to claim a refund of the tax paid on $250,000, or one-half of the 2003 income.

The new law, besides containing the net operating loss provision for business, also extended and expanded the tax credit for first time home buyers. This credit of up to $8,000 was due to expire Nov. 30, but will now be available through April 30, 2010. Buyers need only sign a contract on a house by that date, and must close by June 30, 2010. The credit was also expanded beyond first timers to buyers who have owned a home for five consecutive years out of the past eight. They can qualify for up to $6,500. The credit phases out for single taxpayers with adjusted gross incomes between $125,000 and $145,000 and married couples with AGIs between $225,000 and $245,000.

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