Business Loss? Recover with Net Operating Loss (NOL) Strategies

Business

Question
I have an NOL and would benefit from claiming it in future tax years more than in previous tax years. Can I carry this loss forward instead of carrying it back?

Answer
Indeed you can! In fact, you did exactly the right thing by planning for your best result.

We need to point out that at the time you have to make the NOL forward or back decision, you likely have some facts but also some assumptions about the benefit of the carryforward to future years, whereas you know all the facts and can calculate the exact benefit of the carryback.

In your case, you know pretty well that your big tax-dollar benefits come from carrying forward your loss deductions.

But a warning to our readers: Don’t just go into this NOL willy-nilly without calculating the tax savings both ways. With proper tax planning of your NOLs, you can often reap huge tax savings!

Basic Rule
The tax code says that except as otherwise provided, an NOL for any taxable year.

shall be an NOL carryback to each of the two taxable years preceding the taxable year of such loss, and
shall be an NOL carryover to each of the 20 taxable years following the taxable year of the loss.
But didn’t we just say that you can carry the loss forward instead of carrying it back? Yes, and it’s true.

As you see by the word “except” above, the code contains an exception to the carryback that you can use to save yourself a lot of money. To use the exception, you “elect” to relinquish your entire NOL carryback period.

The rules for electing the carryover and forgoing the carryback are extremely picky. If you don’t make the carryforward election to IRS specifications, you can kiss the carryforward good-bye.

We’ll get to the mechanics of the election momentarily, but first let’s look at an example of how to make the decision.

Example
Your 2015 tax return shows an NOL of $20,000. In 2013 and 2014 you were in the 15 percent tax bracket, so if you carried back your loss to those years, you would get a $3,000 refund ($20,000 x 15 percent).

You know your 2016 is going to be great. In fact, so far it’s proving out just as you thought. So you know with little doubt that you will land in the 39.6 percent tax bracket. With this, your $20,000 NOL would provide a tax savings of $7,920 ($20,000 x 39.6 percent), more than double what the carryback gets you!

As you can see from this example, to get the most benefit from a carryback or carryover, you need to examine the payback. If your best result is to carryback, you carryback the NOL. If your best result is to carryforward, you carryforward the NOL.

Remember, to carryforward the NOL you need to make the tax election on time and with specific wording.3 Don’t mess this up, because that can destroy your NOL benefits.

Timing of the Election
To waive the NOL carryback, you need to file the election by the due date for that return, including extensions of time.For example, you have a 2015 NOL. You need to file the election to forgo the carryback before the due date of your 2015 return. With extensions, that’s September 15, 2016, for C corporations and October 17, 2016, for individuals.

Note. The S corporation passes its NOL to its shareholders on a K-1, and it needs to file its return, with an extension, on or before September 15. Then, the shareholder needs to file his or her return on or before October 17.

You can gain a nice chunk of time that can add certainty to your carryback-or-not decision by waiting until the September or October extended dates to file your tax return. We suggest making the calculations periodically before the final days and filing when you have certainty—which could occur well before the final day.

As an individual, keep this in mind: you have until April 15 to make the election if you don’t file for an extension and until October 17 if you do file for an extension. (For the individual extension, make sure you file Form 4868.

Don’t miss the dates. Once the dates pass, it’s too late. You’re stuck with the carryback.

If you had a tax loss and didn’t file a tax return because no taxes were due and you didn’t know about the NOL possibility, see Claiming the Net Operating Loss (NOL) Carryback If Return Is Filed after the Due Date. (Since you didn’t file by the due date, with extensions, you’re too late for the carryforward-only part and you likely need to hurry so as not to miss the carryback part.)

Wording of the Election
Lawmakers put the heat on the IRS to use exacting standards when it comes to some tax breaks such as an NOL. If you don’t use the proper language in the election, the IRS will deny it. You need to cite Internal Revenue Code Section 172 in the election to pass muster.

(Note. The C corporation can check an “election box” on Line 11, Schedule K, of its IRS Form 1120 instead of attaching a separate election statement.)

Here’s an example of a properly worded election that you should attach to your IRS Form 1040 if you want to carry your NOL forward only:

Election to Relinquish Net Operating Loss Carryback Period Under IRC Section 172(b)(3) Jane DoeSocial Security Number 111-22-3333 Jane Doe incurred a net operating loss of $20,000 for the tax year ended December 31, 2015, and hereby elects to relinquish the entire carryback period with respect to her 2015 net operating loss.
Takeaways
If your business incurs a loss for the year, that’s painful. But it’s nice to know that the tax law can provide some relief.

Lawmakers did you a great favor with the NOL carryback and carryforward rules. Your first step is to see what puts more money in your pocket, going back or going forward.

If you want to go forward only, you need to file the election as we laid it out above. And if you are filing as an individual, you need to file that properly worded election on a timely filed tax return, including extension.

If you fail to make the election to waive the carryback and/or you don’t file the return with the election by the due dates, your only choice is to carryback the NOL.

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