With the economy continuing to trend upward since the 2008 recession, many businesses have returned to profitability. No business owner ever wants to operate at a loss, but sometimes the economy and other factors dictate otherwise. However, a loss isn’t always a bad thing when you’ve been profitable in prior years or anticipate large profits in future periods.
For tax purposes, when you sustain an overall tax loss for any given year, it is termed a net operating loss (“NOL”). You can use an NOL sustained in one year to reduce your taxable income in another year. You typically have two options for purposes of utilizing your NOL. The default option is to carryback the loss two (2) years and whatever isn’t utilized carries forward for up to twenty (20) years before expiration. However, an election can be made to forgo the carryback period and only carryforward the NOL in order to reduce anticipated future taxable income. These options present planning opportunities based upon a taxpayer’s situation.
Carryback Periods. In general, you can carry an NOL back two (2) years. Thus, an NOL arising in 2014 can be carried back to 2012. But, there are exceptions to this two-year rule, discussed below.
You can carry back an unused general business credit one year. An unused general business credit arising in 2014 can be carried back to 2013.
Specified liability losses. An NOL attributable to a "specified liability loss"--i.e., a product liability loss and/or losses attributable to certain deferred statutory liabilities--may be carried back 10 years. A specified liability loss arising in 2014 may be carried back to 2004.
Eligible losses. An NOL attributable to an "eligible loss" may be carried back three years. Thus, an NOL attributable to an eligible loss arising in 2014 may be carried back to 2011.
For individuals, eligible losses are losses arising from a casualty, theft, or disaster.
For taxpayers that are small businesses or are engaged in the trade or business of farming, eligible losses are losses attributable to federally declared disasters. A "small business," for this purpose, is any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts for the three-tax-year period ending before the loss year are $5 million or less.
Farming losses. Farming losses--i.e., NOLs attributable to the income and deductions of a farming business, but not in excess of the taxpayer's NOL for the year-may be carried back five years. Thus, farming losses arising in 2014 may be carried back to 2009. Taxpayers can elect to forego the five-year carryback period for the farming NOL, in which case the normal two-year NOL carryback period applies.
As noted earlier, a taxpayer may elect not to carry back an NOL at all and instead only carry it forward over the allowed carryforward period. Once the election is made for a tax year, it's irrevocable for that year. There is no similar election to forego the carryback of an unused business credit.
Businesses have many challenges before them. Knowing there is a silver lining from an NOL is one of the more positive things to be salvaged from an unprofitable year.
For 25 years, The Tax Warriors® at Drucker & Scaccetti have applied skillful knowledge and decades of experience to help business owners make the most of the issues that arise from recessions and economic turndowns.
Call on us if you would like us to review your situation for business credits. We are always prepared to help you with this or any other tax-related matter.