the worker, homeownership, and business assistance...
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© 2008 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative liability (―KPMG International‖), a Swiss entity. All rights reserved. 1
TAX
The Worker, Homeownership, and Business Assistance Act of 20095-Year NOL Carryback Provision
June 22, 2010
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Circular 230 Disclosure
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED
OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY
A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE
PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED
ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING, OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS
ADDRESSED HEREIN.
The information contained herein is of a general nature and based
on authorities that are subject to change. Applicability of the
information to specific situations should be determined through
consultation with your tax adviser.
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Agenda
Overview of Key Provisions
Practical Considerations
Corporate
Tax Accounting Methods
Practice, Procedure & Administration
State and Local
Q&A
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Overview of New Five-Year Extended NOL
Carryback Election
The Worker, Homeownership, and Business Assistance Act of 2009 (the ―Act‖), signed into law on November 6, 2009, allows most taxpayers an extended carryback period of up to five years for net operating losses (NOLs) incurred in a tax year beginning or ending in 2008 or 2009
Key ProvisionsAbility to elect extended carryback period for 2008 or 2009 NOL
50 percent limitation for NOL carried back to fifth year
Removal of 90 percent limitation for AMT NOL carryback
Special rules for small businesses, life insurance companies, and TARP Recipients
Modification of Corporate Equity Reduction Transaction (CERT) rules to conform with the extended carryback provision
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Election to Extend Carryback from 2008 or 2009
The five-year extended carryback period is available for any NOL
incurred in a tax year beginning or ending in 2008 or 2009
The election to extend the carryback period, however, can only be
made for an NOL from one taxable year
A taxpayer must make the election to extend the carryback period by
the due date — including any extensions — for filing the return for the
taxpayer's last taxable year beginning in 2009
Election can be applicable to C corporations, individuals with Schedule
C income, estates and trusts, tax-exempt entities (to the extent of
UBTI)
Guidance in Rev. Proc. 2009-52 issued November 20, 2009
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member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Suspension of the 90 Percent Limitation for
Alternative Minimum Tax NOL
If the election to use a three, four, or five-year carryback is made, it also extends the carryback period for an alternative minimum tax net operating loss (ATNOL)
For such ATNOL carryback, the Act eliminates the general restriction that an ATNOL can offset only 90 percent of the AMTI in the carryback year
An ATNOL carried back to the fifth previous tax year can only offset 50 percent of the pre-ATNOL AMTI
An ATNOL may be carried forward to offset 100 percent of AMTI
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member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Exception for TARP Recipients
The extended carryback election is not available for ―TARP Recipients,‖ as defined in the Act
If a taxpayer becomes a TARP Recipient after making the NOL carryback election, the taxpayer is retroactively rendered ineligible for the extended carryback, and may be required to file amended returns
See also section 2.10 in Rev. Proc. 2009-52
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Effect of NOL Carryback on Prior Year Returns
Evaluate potential unintended consequences of carrying
back NOL:
Taxpayer’s ability to claim certain credits, whether with
a limited or unlimited carryforward period
NOL carryback effect on computation of income and
items based on taxable income
Section 199 deduction
Taxpayer’s ability to change from claiming a foreign tax
credit to deducting foreign taxes
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member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Retroactive Loss Corporation Status
Section 382 applies when taxpayer becomes a ―loss
corporation‖
NOL carryback may reduce taxable income in a prior
year, ―freeing up‖ credits and causing a taxpayer to
retroactively become a loss corporation
A modeling exercise may illustrate the potential for
differing ownership change dates
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Carryover of Recognized Built-In Loss
Disallowed RBIL shall be carried forward under rules
similar to rules for carrying forward NOLs
A taxpayer should consider how extended carryback may
impact the potential for existing (or arising) ownership
changes, where a NUBIL may be present
Consider amount (or existence) of NUBIL as of each
potential ownership change date – see modeling exercise
Circular calculation?
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Right to Refund Claim
Before filing carryback claim, it is prudent to determine who
has the right to any refund
Considerations may include:
Was the company to which the NOL is being carried acquired
during the extended carryback period, and was the right to any
refund claims addressed in a purchase and sale agreement?
Does the year to which (or from which) an NOL may be carried
impact the right to the refund claim?
Also, see Rev. Proc. 2009-52, section 4.01(2), regarding
carryback waiver election described in Treas. Reg. section
1.1502-21(b)(3)(ii)(B)
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member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Alternative Use of NOLs and Other Attributes
Taxpayers with cancellation of indebtedness income (―CODI‖) need to consider multiple variables, including:
Taxpayers that are insolvent or in a title 11 case may choose:
Normal or extended NOL carryback period; or
Exclusion of CODI with attribute reduction, or CODI deferral
Both NOL carryback period and CODI deferral may be made on a sliding scale
Taxpayers that are solvent may choose:
Normal or extended NOL carryback; or
Current inclusion of CODI, or CODI deferral
Both NOL carryback period and CODI deferral may be made on a sliding scale
NOL carryback generally occurs prior to attribute reduction
Consolidated return rules add further complexity
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member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Subsidiary Stock Basis Adjustment Consideration
When proposing the sale of subsidiary (S) stock, consider the impact an extended NOL carryback may have on the sale of S:
If S contributed to the consolidated NOL (CNOL), a carryback of such CNOL generally reduces the basis in S stock in the year the NOL was generated
Taxpayer may choose what is more beneficial: Generally, carryback of ordinary NOL versus increase in capital gain (or decrease in capital loss) on sale of S stock
In the case of a loss, consider the impact of Treas. Reg. section 1.1502-36
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Taxpayers with Different Elections Joining One
Consolidated Group (or Merging Together)
A taxpayer that is considering an acquisition or disposition should consider how the extended carryback could interplay with the election of a potential target or acquirer:
Due to the one-year carryback choice (2008 or 2009), what if a target filed a 2008 extended carryback claim for $10, and acquirer is considering filing a 2009 extended carryback period claim for $1,000?
Successor issues may arise for both tax-free mergers and other tax-free reorganizations
In conducting due diligence, certain issues should be considered:
Has target ever been a ―TARP Recipient‖? or
Has target filed an extended carryback claim?
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Tax Accounting Methods Considerations
Overall approach
Accelerate deductions into 2009
Defer income into 2010
Key criteria
Reduction of 2009 taxable income would create or
increase NOL
Taxable income available for offset in earlier year
2009 NOLs otherwise projected to expire based on
future taxable income projections
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Procedural Issues
Non-automatic changes
Form 3115 must be filed by end of year of change, i.e.,
December 31, 2009 for calendar 2009 taxpayers
Rev. Proc. 97-27 (as modified) applies
Automatic changes
Form 3115 must be filed by extended due date of return
for year of change
Rev. Proc. 2008-52 (as modified) applies
Special procedures for taxpayers under examination,
before Appeals, or before federal court
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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Examples of Issues to Be Addressed
Tenant allowances
Section 475/mark-to-market
Section 195/start-up expenditures
Section 460/long-term contracts
Fixed assets
Fixed liabilities
Recurring item exception
12-month rule
LIFO/IPIC method
FIFO/lower of cost or market
Inventory obsolescence
Section 263A/uniform capitalization
Advance payments
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (―KPMG International‖), a Swiss entity. All rights reserved.
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State and Local Tax Consequences of Federal NOL
Carryback
States adopt different approaches
Some states will automatically conform to the federal NOL carryback period
Some states might decouple
Other states will update their IRC conformity dates in the future and might decouple
Many states do not currently conform to the federal NOL carryback period
Many states do not conform to all federal deductions
States that conform to deductions based on federal taxable income
(e.g., section 199) could see state taxable income increase
States that do not conform to these deductions (e.g., section 199)
may have the same state taxable income, but items on the state tax
return may change, potentially requiring amended state returns