While the economy appears to be rebounding, many businesses are still suffering. Because of this, many will be filing net operating losses this year.
Good News About Net Operating Losses
Lawmakers are not entirely insulated from the businesses world, so the IRS remains lenient when it comes to loss. Section 172 of the Internal Revenue Code allows businesses to either carry losses back for two years or offset them against future earnings for up to 20 years. This tax relief is available for sole proprietorships through multimillion dollar corporations.
Backward or Forward?
For most businesses, the pressing question is whether to carry losses backward or forward. There are a few issues to consider. First, carry backs can’t decrease self employment taxes. This is a concern for many sole proprietorships. Second, many businesses have already applied their net operating loss credit for prior years, as the economy has suffered for almost a decade now. In many cases, it is easier to carry the NOL forward, especially if you plan to earn more in the future.
When Not to Carry It Forward
There are a few times when carrying a net operating loss forward can be a bad plan. If you are not foreseeing high future profits, then this tactic may not save as much as you expect. If you have been profitable in past years, getting a refund now will mean more revenue to reinvest in a struggling business. If there are losses left after your maximum deduction, then these can be carried forward into future years. In addition, carrying a loss backward opens up that tax return to an audit. Be sure you are not vulnerable before making this decision.
Deciding how to handle net operating losses is a matter best left up to a tax professional. A certified public accountant can best determine the route that will lead to the most savings and the most revenue for a business that desperately needs it. The economic climate has been rough for all kinds of businesses for years, so it is important to keep whatever money you can and reinvest it wisely.
As a CPA with over 18 years of experience, Gary Kaplan is available to assist taxpayers with a broad assortment of tax and accounting situations. Taxpayers in Florida, Maryland, New York, Washington, D.C., and Utah are encouraged to give Mr. Kaplan a call to discuss their unique tax situation.
