Net operating losses: year-end tax strategy

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in Small Business Tax

If your company incurs an annual net operating loss (NOL), it can generally carry back the loss for two years and then forward for up to 20 years. Therefore, you generally can use an NOL from this year to offset highly taxed income from the prior two years.

Strategy:
Postpone taxable income to next year to secure an NOL this year. For instance, you may delay billing on jobs so the income won’t be received until 2010. Similarly, you might accelerate the purchase of routine deductible expenses from next year into this year to offset current income.

Conversely, you can elect to carry forward your NOL instead of carrying it back for two years. This may be preferable if your company had low-income years in the past and you expect the next few years to be high-income years.

Note that the new economic stimulus law extends the carryback period from two years to five years, but only for NOLs incurred in a tax year beginning or ending in 2008.

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