When the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.
Carrying back or forward your net operating loss
The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years. Any remaining amount can be carried forward up to twenty years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.
However, there is an alternative. The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial. This may be the case if the business’s income increases substantially. With higher income, the business could be pushed into a higher tax bracket. Additionally, if tax rates increase, the loss carryforward would generate more tax benefit in the future. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.
Your situation is unique
Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.
Please contact your tax adviser if you need more information on the NOL rules and how you can maximize the tax benefits of an NOL.
