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Net operating losses: Cash in by looking back, not forward

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in Small Business Tax,Small Business Tax Deduction Strategies

The 2003 tax law slashed income taxes for most taxpayers. But what if you show a net operating loss (NOL) and no taxable income at year-end?

For 2003 and 2004, individuals with NOLs will likely do better by carrying them back to previous years, rather than forward to future years. Here's why:

Carry back to higher-taxed years

NOLs could come from an S corporation, a partnership or a sole proprietorship (reported on Schedule C). You can typically carry back such NOLs for two years on amended returns. Or you can waive the carry-back and push NOLs forward for up to 20 years.

It's probably smarter to carry back NOLs from 2003 and 2004 because you'll use the losses in years when tax rates were higher, and NOLs will save you more in taxes.

Example: A $1,000 NOL incurred in 2003 that offsets income taxed at the highest rate for 2001 (39.1 percent) would result in a $391 tax refund. But the same NOL carried for...(register to read more)

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