The Internal Revenue Service has issued guidance on how companies can claim a refund under a recent Congressional gift—an extension of net operating loss carryback provisions to enable companies to offset current losses with tax refunds from prior years.

While typically companies can carry net operating losses back for up to two years, the recent Worker, Homeownership, and Business Assistance Act of 2009 allows companies to carry losses back as far as five years. That gives companies a greater opportunity to improve current cash flow by claiming a refund on taxes paid as far back as five years ago.

“The guidance is fairly simple,” said David Culp, senior manager with the KPMG national tax practice. The guidance is clear that any company can make an election for either their 2008 or 2009 tax year, even if the 2008 tax return has already been filed and a net operating loss claim has already been made in 2008, he said.

“You can amend it and make another claim under the five-year rule,” said Culp. “There’s still plenty of time to do that. The opportunity to make an election in 2008 or 2009 is still wide open.”

Tax departments are buzzing—or should be—over how best to leverage this cash flow gift from Uncle Sam, said Culp. If companies have losses in 2008 and 2009 that they’d like to carry back, they need to look at their prior-year tax payments and think about where best to place the claim.

“They have a lot to consider,” he said. Reducing taxable income in one or more earlier tax years will reduce taxable income in those carryback years, which can affect the deductions or credits that were taken in those years, Culp said. Tax staff should be doing some kind of scheduling or basic recalculations of earlier tax years to decide how best to claim the extended carryback opportunity, he said.

Mike Corrente, a managing director with CBIZ Tofias, said companies also need to take into account that carrying a tax benefit into a settled tax year can re-open the tax return to IRS scrutiny, even if statutes of limitation were otherwise closed. “If you carry a 2009 loss back to 2004 and get a refund from taxes you paid that year, the IRS has a right to take another look at that year,” he said.

In addition to the obvious potential tax consequences, that leads to some financial reporting consequences as well, Corrente said. Companies need to look at those tax years from which it plans to pluck refunds and consider whether the exposure to IRS scrutiny raises any uncertainties that need to be reported in current financial statements, he said. And as companies consider current year-end financial reporting, they also need to assure their deferred tax assets reflect any plans to claim a refund, he said.