There is no provision in North Carolina law to allow individuals the extended three, four, or five-year carryback period for 2008 net operating losses (NOLs) allowed for federal tax purposes under the American Recovery and Reinvestment Act of 2009 (ARRA), signed into law by President Obama on February 17, 2009. Generally, an eligible small business is a business that meets a $15 million average annual gross receipts test.

Under North Carolina law, an individual’s NOL may generally be carried back two taxable years preceding the loss year and carried forward to each of the succeeding twenty taxable years following the loss year, or only carried forward if the taxpayer waives the entire carryback period. Pursuant to G.S. 105-228.90(b)(1b), the State’s current reference to the Internal Revenue Code is May 1, 2008 and, therefore, does not include the Code provisions enacted on February 17, 2009. Adopting such provisions would require enabling legislation by the General Assembly.

Because of the difference in federal and State law for the tax year to which the loss may be carried for federal and State purposes, taxpayers currently have three options:

(1) Carry back the NOL for North Carolina purposes to the same tax year, electing the federal three, four, or five-year carryback under the ARRA by amending the same applicable prior year State returns as those for federal purposes. Include a copy of federal Form 1045 with Schedules A and B. The Department will hold these amended returns pending the General Assembly’s decision regarding the extended carryback period.

If the General Assembly does not adopt the extended carryback provision, corrected North Carolina amended returns would have to be filed for 2006 and 2007 to reflect the carryback to only those years rather than the extended carryback period initially elected for federal purposes. A corrected federal Form 1045 with Schedules A and B, prepared as though the taxpayer was claiming the entire NOL as a two year carryback for federal purposes, must be included with the revised 2006 and 2007 returns.

(2) Carry back the entire NOL for North Carolina purposes to tax years 2006 and 2007, while electing the extended carryback period for federal purposes. A taxpayer who computes a three, four, or five-year carryback for federal purposes must compute a separate North Carolina carryback for two years on a federal Form 1045 (including Schedules A and B) as though that taxpayer was claiming the entire NOL as a two year carryback to 2006 for federal purposes. This federal Form 1045 with Schedules A and B, must be included with the amended 2006 and 2007 returns. This would begin the process of receiving the refunds.

If the General Assembly subsequently adopts the extended carryback provision for North Carolina purposes, additional amended returns would have to be filed to carry the NOL to the same tax year as that elected for federal purposes as well as revising previously filed 2006 and 2007 amended State returns. Include a copy of Federal Form 1045 with Schedules A and B used for federal purposes.

(3) Carry back the NOL for federal and North Carolina purposes to tax years 2006 and 2007, rather than electing the federal three, four, or five-year carryback under ARRA. This would begin the process of receiving the refunds and there would be no subsequent North Carolina amended returns required.

Regardless of which option is chosen, include a statement on the Amended North Carolina Individual Income Tax Return, Form D-400X, identifying to which tax years the NOL was carried for federal and State purposes.

Personal Taxes Division
NCDOR
May 18, 2009

Last modified on: 05/18/09 03:58:15 PM.