Can't Get Ahead?
Beverly is about to retire from her job as a legal secretary. Her partner, Bill, retired several months ago as a civil engineer.
So far, though, their stock photo business has been a drain on their finances. Income has been more than offset by outlays for the purchase of a scanner, new digital camera, repairs, airline flights, and licenses. For 2001, they anticipate a sizable loss, but hope to turn a profit in 2002.
Beverly and Bill have lots of company. All too many new or refinanced enterprises experience losses, especially in the early years of operation. To add to their problems, they neglected to familiarize themselves with the tax rules.
What should Beverly and Bill do? Find out as soon as possible how to take maximum advantage of a special tax break for red-ink years.
The key to their opportunity: Internal Revenue Code Section 172, an often-overlooked relief provision for someone with an NOL (net operating loss), which is IRS lingo for when expenses are greater than receipts.
Section 172 provides two options when you have an NOL from the active operation of a business this year. Use the NOL as a (1) carryback to offset income reported in earlier years or (2) carryforward to offset income in later years. That tactic enables you to decrease or recover tax payments for those years.
Should you go back or forward? Usually, an ailing business ought to first employ the NOL as a subtraction from business profit (there need not be any) or other types of income listed on the two earlier returns. This tactic is especially advantageous should you be strapped for cash.
But suppose the NOL is greater than the income for the two previous years. The unused part of any NOL not applied as an income offset then gets applied under the carryforward rules, until used up, as a subtraction from business profits (here, too, there need not be any) or other kinds of income listed on returns for the following 20 years.
An alternative is to forget about a carryback and use the NOL only as a carryforward, provided it is advantageous to do so. Going this route seems advisable when, for example, you were in low brackets on the two earlier 1040s and anticipate falling into loftier brackets on subsequent 1040s.
Let's say you suffer a business loss for 2001, and that both 1999 and 2000 were low-bracket years. But you expect to go gangbusters for 2002 and later years. With this scenario, you decide to forgo any carryback for 2001's NOL. This assumes you'll be using up the NOL during post-2000 years.
You do not have an unlimited amount of time to decide whether to pass up a carryback and elect a carryforward of 2001's NOL. But the IRS is flexible on the deadline: not until the 2001 return's due date, including any filing extensions. Generally, that decision is irrevocable, once made.
Julian Block, a former IRS agent and tax attorney, is the author of "Julian Block's Tax Avoidance Secrets" ($29.95 p&h included, 560 pgs. Mention you are a PhotoStockNotes subscriber and receive the book for $19.95. Julian Block, 3 Washington Sq, Larchmont NY 10538-2032). For Julian's tax saving and tax planning reports, go to http://www.photosourcefolio.com/TaxReports.htm. Julian can be reached at julianblock@yahoo.com.
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