IRS Extends Tax Breaks From Net Operating Losses

The Internal Revenue Service (IRS) is extending the time period for claiming tax breaks made available in March 2002 to individuals and businesses with net operating losses in tax years ending in 2001 or 2002.

Because of the timing of the Job Creation and Worker Assistance Act of 2002, many taxpayers filed their tax returns before this new law was passed and have not yet filed for refunds. Some may have been unaware that they could carry their losses back for five years, instead of the two year maximum allowed under prior law. Others may have felt time or cost pressures to make elections to forego the 5-year carryback. As a result, Revenue Procedure 2002-40 gives taxpayers additional flexibility and more time to take advantage of the new 5-year carryback.

An extended filing deadline of October 31, 2002 is designed to help taxpayers in a variety of situations:

  • Taxpayers who made elections to forego the 5-year carryback can still revoke their elections.
  • Taxpayers who simply applied the former 2-year period without making any elections can still apply for tentative carryback adjustments, even if the 12-month period for filing the application has expired.
  • Taxpayers who neither made elections to forego the 5-year carryback, nor used the 2-year carryback period, can still make their elections to keep the 2-year period.

To make an election or apply for a refund, corporations should file Form 1139, "Corporation Application for Tentative Reform" or Form 1120X "Amended U.S. Corporation Income Tax Return." Individuals should file Form 1045, "Application for Tentative Refund," or Form 1040X, "Amended U.S. Individual Tax Return." Estates and Trusts should file a Form 1045 or amended Form 1041, "U.S. Income Tax Return for Estates and Trusts." Write across the top of the form, "Revocation of NOL carryback waiver under Rev. Proc. 2002-40" or "Amended refund claim under Rev. Proc. 2002-40," as applicable.

Download Announcement 2002-66 and Rev. Proc. 2002-40.

-Rosemary Schlank

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