While home buyer tax credit provisions received most of the attention, legislation passed by Congress yesterday also contains a generous tax provision that may give some midsized and large home building companies a much-needed cash injection in coming months.
Specifically, The Worker, Homeownership, and Business Assistance Act of 2009, signed by the president earlier today, allows any business large or small to carry back losses five years. Only small businesses doing less than $15 million in revenue could do this previously. The bill permits builders and other companies to claim write-offs for net operating losses in either 2008 or 2009, but not both.
Since most companies have already filed their 2008 tax returns, they could file for a refund almost immediately. But builders eager to get tax refunds may want to wait for the IRS to issue guidance on the carryback, according to industry tax experts. That guidance may make a difference over whether builders carry back their losses from 2008 or 2009.
The legislation allows companies to carry back 100% of losses in years one through four. In year five, the carryback is limited to 50% of a company’s taxable income in that year. Unused losses in year five are still eligible for the 20-year carry forward.
“The new NOL [net operating losses] legislation has some complexities,” notes Steve Friedman, national director, home building services for Ernst & Young. “For example, the five-year carryback is a one-time-only election. Builders will need to evaluate in which year to claim it, taking into account the 50% haircut for the fifth year.”
Additionally, Friedman notes that the window for taking the carryback is open though 2009, which may spark some deal-making. “Some builders may want to sell assets this year, rather than next year, to maximize their potential carrybacks. Conversely, builders with large current cash balances may want to buy some of those assets if the pricing is right.”
The cash infusion comes at a time when many private builders, victims of a national credit crunch, are having trouble making payroll and paying creditors. “The new NOL rules will throw a lifeline to struggling businesses, allowing them to continue making payrolls, paying business loans, and otherwise keep their doors open until the economic recovery takes hold,” said Joe Robson, chairman of the National Association of Home Builders.
Public companies, on the other hand, are sitting on record amounts of cash. JPMorgan estimates that the major public builders it covers average $1.2 billion in cash on hand, compared to $616 million at the end of 2007. Given their cash reserves, they may be less likely to take the deductions, which may involve taking land impairments at a time when they are struggling to regain profitability.
“We think the impact [on public builders] will be relatively modest,” Michael Rehaut, who follows home building for JPMorgan, wrote in a Nov. 5, 2009 letter. “Under the previous look back period of two years, builders only utilized roughly 50% of the potential refund available to them.”
Nevertheless, the NAHB estimates that the carryback provision, which will cost the federal government $63 billion over the next two years by Treasury calculations, will be enough to keep thousands of home building and related companies in business. The NAHB estimates that the provision will prevent the loss of at least 30,000 industry jobs.
A similar expanded carryback provision was part of last year’s stimulus plan put forward by the Obama administration. At the last moment, though, the benefit was restricted to small businesses doing less than $15 million. Also, it only applied to losses in 2008. The provision re-surfaced in the Obama administration’s 2010 budget proposal.
Previously, midsized and large companies could only carry back losses two years. The two-year window gave home builders a relatively small amount of taxable income to offset. Some didn’t have enough taxable income to claim all their losses. As a result, they had to push their net operating loss deductions forward.
Small business, defined as less than $15 million in gross receipts, would be able to claim a five-year carryback for 2008 losses (under last year’s American Recovery and Reinvestment Act), and for 2009 losses.
There would be no limitation claimed against Alternative Minimum tax liability in carryback years. This is important for home building and construction, since many businesses are organized as pass-thru entities, such as S Corporations and Limited Liability Corporations.
The Department of the Treasury Office of Tax Analysis has estimated that the five-year NOL carryback proposal would result in a revenue loss to the Treasury of $63.5 billion in fiscal years 2009 and 2010. But it would also result in a $45 billion revenue gain for fiscal years 2011 through 2019 as businesses didn’t take future deductions.
Boyce Thompson is editorial director of Builder magazine.