Considering the economic conditions as of late, many taxpayers have found themselves incurring economic losses. These economic losses have translated into taxable losses, which, as a general rule, can be carried back to offset taxable income from up to two years prior. Under special provisions enacted for 2008 and 2009 losses, taxpayers can elect to carry back these losses to offset taxable income from as far back as three, four or even five years prior. All carrybacks can result in a refund of the taxes paid in those years. Any remaining losses are carried forward to the next preceding year.
In order to determine what this refund will be, the tax liability for the carryback year is recalculated by deducting the loss in arriving at adjusted gross income (AGI) and re-figuring deductions and credits that are calculated based on AGI using the lower AGI amount. On the surface, this task does not seem overly complicated. However, the mechanics of this calculation are not as simple as it would seem as there are several items that are afforded special treatment when performing re-computations in carry back years. Two such items are the charitable contribution deduction and the alternative minimum tax (AMT).
Normally, a charitable contribution deduction can be limited based on your AGI, with any excess deduction carried forward to subsequent years. In a carryback year, since AGI is decreased, a corresponding decrease can occur to the amount of charitable contributions allowed as a deduction. This rule holds true when calculating the tax liability in the carryback year; however, any disallowed charitable contributions do not carryover to the subsequent year. Instead, these disallowed deductions are added to any excess net operating loss, essentially converting a charitable contribution carryovers to a net operating loss carryover. Depending on the taxpayer’s situation, this consequence is either favorable or unfavorable. Favorable if the taxpayer has excess NOL because it extends the carryover period of the deduction (20 years for NOLs versus five years for charitable contribution deductions). Unfavorable if the taxpayer used his entire NOL in the carryback year, thereby losing the deduction entirely.
As a general rule, only 90% of alternative minimum taxable income can be offset by a net operating loss, with the same carryover provisions as regular tax NOLs. However, in calculating alternative minimum taxable income in a carryback year, 100% of this income can be offset by a net operating loss. This rule results in a smaller AMT NOL carryover than would be available under normal circumstances, and can be unfavorable for a taxpayer who is in AMT in carryback years.