Congress Expands the Net Operating Loss Carryback By: Charles J. Garrison, CPA Date: 11/19/09   Background Over the last two years, many community banks have experienced losses due to deteriorating credit quality and required provisions to the allowance for loan losses.  This has resulted in tax losses that exceeded taxable income for the prior two years.  Historically, corporations have been allowed to carry losses back to the two previous years and claim a refund for taxes paid in those profitable years.  Any losses that could not be carried back were carried forward for up to twenty years.  Unfortunately, regulatory requirements do not allow banks to recognize the benefit of these loss carryforwards that extend beyond the next calendar year.  New Legislations The American Recovery and Reinvestment Act of 2009 allowed small businesses (defined as corporations with annual gross receipts of less than $15 million) to carry losses back to three, four, or five years.  This provision enabled these corporations to claim a refund and recognize the income benefit without the need to record a potentially disallowed deferred tax asset.  Under the Worker, Homeownership, and Business Assistance Act of 2009, most corporations may now carry losses back for up to five years.  Corporations with gross receipts in excess of $15 million can utilize the carryback provision during either 2008 or 2009, generally meaning that banks should determine the year with the greatest taxable loss and elect the extended carryback provision for that year.  Small businesses can elect the extended carryback provision to both 2008 and 2009, which may enable smaller banks to amend 2008 tax returns to claim additional refunds. Impact on Capital Regulatory guidance generally allows banks to record a deferred tax asset and the resulting income tax benefit to the extent that the deferred tax asset, net of any deferred tax liability, does not exceed the expected income tax liability over the next year.  This has resulted in disallowed deferred tax assets for many banks in that the losses remaining after any carrybacks exceed projected income for the succeeding year.  Most banks now have the potential ability to carry all losses back, thereby claiming a refund and the income tax benefit, without the need to record a deferred tax asset.  This could potentially result in income that would not otherwise have been realized. Additional Provisions Unfortunately, banks that participated in the Troubled Asset Relief Program (TARP) cannot apply the extended carryback provisions for either 2008 or 2009 losses.  This applies to taxpayers if the federal government acquired an equity interest or warrant in the taxpayer prior to November 6, 2009. Many banks with net operating losses have still paid income tax under the Alternative Minimum Tax provision of the Internal Revenue Code.  The new legislation relaxes these requirements, enabling banks to receive a refund without the need to pay Alternative Minimum Tax.