Individuals who have losses passed-through in 2008 from partnerships, LLCs, or S corporations may be eligible for a 3-year, 4-year, or 5-year NOL carryback under the American Recovery and Reinvestment Act of 2009, instead of the normal 2-year carryback period. Individuals who are sole proprietors (Schedule C operations) may also be eligible for the extended loss carryback. This provision applies to losses generated by a trade or business (including theft losses; see below). The IRS has produced a new 2008 Form 1045, Application for Tentative Refund, to reflect this new provision.

A few important things to keep in mind about the extended carryback provision:

1    This provision only applies to businesses that have average annual gross receipts of less than $15 million for the 3-year period 2006-2008. This test must be done on a controlled-group basis. Therefore, the individual will need to add together the gross receipts of all entities in which he or she owns more than 50% in measuring for the $15 million gross receipts test.

For example, say an individual is a partner in three partnerships A, B, and C which have average annual gross receipts of $10 million, $12 million, and $14 million, respectively. Further assume that this individual owns a 51% interest in both Partnerships A and B and a 40% interest in Partnership C. Under the new rules, Partnerships A and B are treated as one business under the aggregation rules and, since the average annual gross receipts of Partnerships A and B together exceed $15 million, the individual may not use the extended carryback provision for losses from those partnerships. However, the individual may still extend the carryback related to the portion of the 2008 NOL that flows from Partnership C.

2   The IRS has said that losses from Ponzi schemes, like the Madoff situation, may be deducted as theft losses and because theft losses are treated as business losses for NOL purposes, the individual suffering such losses is considered a sole proprietor. This means that the individual can use the 3-year, 4-year, or 5-year carryback period for his or her 2008 Ponzi scheme losses, assuming the individual has average annual gross receipts of less than $15 million.

3  Any net operating losses not fully utilized in the extended carryback period may be carried forward and used in 2009 through 2028. An election is available to forego the extended carryback period and carry the entire 2008 net operating loss forward for 20 years.

4  There is an April 17, 2009 deadline to revoke any previous elections to waive the NOL carryback or to extend the carryback period when 2-year carryback claims for 2008 have already been filed.

Individuals should also consider the tax laws in the states in which they file.  While most states generally allow deductions for net operating losses, most do not allow the carryback of net operating losses and some place restrictions on the amount of loss that can be carried back.