Arizona Department of Revenue Statement on 2008 Net Operating Losses

Today at the 2009 Arizona Tax Legislation Update at the Arizona Society of CPAs offices, James Busby distributed a new document that was issued today by the Arizona Department of Revenue. While not an official ruling in the sense of an Individual Tax Procedure, this does serve as the most “official” position to date of the Arizona Department of Revenue on the treatment of 2008 net operating losses.

As you are likely aware, in the American Recovery and Reinvestment Act of 2009 the Congress allowed individuals who incurred a net operating loss in 2008 to carry that loss back 3, 4 or 5 years if they elected to do so. However, that law was passed after the beginning of 2009, and the Arizona conformity legislation only addressed federal law changes through January 1, 2009. That left individual taxpayers that filed a 3, 4 or 5 year carryback for federal purposes wondering how to file for Arizona.

Today’s notice makes clear that the Department of Revenue holds that currently Arizona law does not recognize the option to carry back losses 3, 4 or 5 years, but generally would require a 2 year carryback for most taxpayers. However the Department noted that it is expected the Legislature will deal with the matter eventually, if no earlier than in the next regular session that begins in January.

The Department suggests that taxpayers delay filing any carryback with Arizona until the Legislature acts. However, it is possible some taxpayers might face a statute problem (especially when we don’t know how Arizona will adopt the change) and others may not wish to forego any refund for what could be an extended period.

If a taxpayer has already filed a 3, 4 or 5 carryback with Arizona and the claim has been denied, taxpayers will have to file a protest with the Department of Revenue. James Busby suggested in his presentation that the protest be filed with the notation that the taxpayer wished action on the protest be delayed until such time as the Legislature acts on the matter.

Taxpayers who do not want to wait and wish to file now are advised to compute the carryback based on the prior two year carryback period. The Department indicated they will allow such claims, but warns that amended claims will need to be filed should the Legislature later enact retroactive conformity.

The Arizona Department of Revenue notice reminds taxpayers that Arizona law does not allow carrybacks for corporations, so the federal law change did not have any impact on corporate taxpayers.