The new economic stimulus law provides special relief for some small business owners. It allows you to carry back net operating losses (NOLs) for up to five years instead of just two. This tax break applies to NOLs in tax years beginning or ending in 2008.
Strategy: Get your cash back quickly. File the necessary form now to recover taxes paid for prior years when your business was more prosperous.
For this purpose, a qualified “small business” is one with average annual gross receipts of $15 million or less.
Here’s the whole story: If a business is in the red for the year, it can carry back the NOL for two years and then forward for up to 20 years until the loss is exhausted. This is an exception to the general rule that taxable income is based on the current year’s events. In effect, the NOL deduction enables you to offset one year’s losses against a different year’s income.
Now the new law permits carrybacks of an NOL in 2008 by a small business to the tax years from 2003 through 2005. In other words, you can carry back a 2008 NOL to 2005, 2004 or 2003—your choice. You’re not limited to carrybacks for just 2006 and 2007.
There are two ways that corporations and individuals can apply for an NOL refund:
1. File an Application for a Tentative Refund. Use Form 1139 for C corporations and Form 1045 for individuals. These forms are filed separately from the regular tax return for the year of the loss.
2. If you’ve already filed your 2008 return, you can file an amended return. Use Form 1120X for C corps and Form 1040X for individuals. Search for the proper forms at www.irs.gov.
A C corp must file Form 1139 within 12 months following the end of the year in which the NOL occurred. It must include the first two pages of the corporate return (Form 1120) with Form 1139.
If an individual in a pass-through entity like a partnership, S corp or limited liability company (LLC) reports an NOL, Form 1045 must be filed within one year of the end of the year of the loss. The same holds true for a loss from a sole proprietorship. Attach the first two pages of Form 1040 and other relevant forms and schedules. As with a corporation, you have three years from the tax return due date to file an amended return.
Conversely, a business might elect to carry forward an NOL instead of carrying it back for two years. This may be preferable if your company experienced low-income years in the recent past and expects the next few years to be high-income years.
Tip: The election to forgo a carryback and use the carryforward is irrevocable.
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