Question

Problem 3-25 Net Operating Losses (LO 3.12)

Carl has had a couple of profitable years in his new business. However, in the current year he has a net operating loss of $80,000. He does not feel that the future of his business is very bright and as such does not believe he will generate much taxable income in the future. As his tax accountant, how would you recommend Carl treat his net operating loss? Under the general rule, a net operating loss is carried back years and forward years. Since he is uncertain about future income,

Answer 1

Carl has couple of good year in past but in current year he is having Net Operating Loss (means deduction is more than income). IRS provides that in case business has NOL it can carry back NOL by 2 year, prior to year of NOL or can waive carry back and can adjust NOL as carry forward till next 20 year. Carry back for 2 year is optional, one can opt both carry back for 2 year as well as carry forward for next 20 year.

Advice to Carl:

1. Carry back NOL for last 2 year.
2. If still NOL balance left carry forward NOL for another 20 year.