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Carry NOLs back and forth

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in Small Business Tax

It’s not unusual for a small business to show a tax loss for the year, especially in the early years of operation. Fortunately, there’s a silver tax lining.

Strategy: Use a net operating loss (NOL) to offset income in other years. Generally, you can carry back an NOL for two years. Then you can carry forward any excess loss for up to 20 years.

Alternatively, you can elect to forgo the NOL carryback, depending on your circumstances. If you make this election, the entire NOL is carried forward for up to 20 years.

Here’s the whole story: The tax rules for NOLs are complex. Typically, if you have a loss in 2016, an NOL can reduce your tax liability for 2014 and 2015. This may entitle you to a tax refund. However, if you expect income from your business activity to soar the next few years, you can elect to carry the entire NOL forward. The exact mechanics will depend on the form of business ownership.

  • If you’re a sole proprietor, you can deduct any loss your business incurs from other income for the year. Thus, the NOL can offset income from another job, your spouse’s income if you’re a joint filer and investment income.
  • If you operate your business as a partnership, S corp or limited liability company (LLC), a share of the NOL is passed through. You can use the loss to offset other personal income, just like a sole proprietor.
  • If you operate your business as a C corp, the loss can’t be deducted on your personal return. It belongs to the corporation.

Tip: Don’t ignore the tax law formalities for NOLs.

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