Dear Tax Talk,
In 2008 I had large losses from real estate that I was able to carry back to 2003 and recover taxes paid. According to my accountant, it was a change in the law that year that allowed a longer carryback for small businesses. In 2009, I had losses again and I want to take the loss to 2007 which is the last year that I paid big taxes. Is that OK or do I have to go back to earlier years like I did in 2008?
— Russ

Dear Russ,
A carryback of a tax loss allows taxpayers to immediately recover tax paid in earlier years when they sustain a business or casualty loss. Previously limited to a two-year recovery of past taxes, 2009 tax law changes expanded that to five years. Imagine if you could eliminate all the taxes you paid in the last five years. It would certainly help alleviate your large losses and may get you back in business.

Although it was the intent of Congress to help taxpayers recover as much prior taxes as possible, they created a confusing set of rules when they made the changes that allowed taxpayers to elect up to a five-year carryback. Without an election, taxpayers are limited to a two-year carryback period. The original law change expanding the carryback period applied to eligible small businesses for 2008 only. This change happened soon after President Barack Obama was elected, when The American Recovery and Reinvestment Act, or ARRA, was passed in February 2009.

In November 2009, The Worker, Homeownership and Business Assistance Act, or WHBAA, of 2009 was passed and allowed a five-year carryback to most taxpayers, even those that were not small businesses. This second law change applies for losses in 2008 and 2009, if the taxpayer elects. To qualify under the WHBAA, the taxpayer must have not received TARP funds. For example, General Motors would not qualify for a 2003 to 2006 tax refund.

Because you made your election under ARRA, the WHBAA rules would have no effect on your 2009 losses unless you elect to apply them. In determining which year is the best carryback year, you have to look to when you paid the highest taxes compared to your taxable income. If 2007 is the last year that you paid big taxes, then that is when you would want to carryback to. Since without the WHBAA election this is the year that you are eligible to carryback to, the election does not benefit you and you would not make the election. Other taxpayers interested in the longer carryback for 2008 and 2009 should see the IRS’s question and answer on the ARRA and WHBAA carryback elections.

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