Tax Tip from the week of July 19, 2004

Business NOLs: What you need to know

You’ve probably heard people throwing around the term “NOL.” It stands for “net operating loss” and refers to a tax operating loss incurred by a business. Generally, you have an NOL when your allowable deductions exceed your income from the business, subject to some technical adjustments. You can have a business NOL whether you do business as a corporation, a partner, or as a sole proprietor.

When you have a business NOL, you obviously won’t owe taxes on your business activity for that year. That’s when NOL “carrybacks” and “carryovers” come in. These allow you to recover taxes you’ve paid in prior years or to reduce your future tax liability.

NOL carryback. You can usually carry back your NOL to apply against income for prior years. Generally, if you do that, you’ll receive a refund of taxes you paid in those prior years.

NOL carryover. If you have excess NOLs that you can’t apply against earlier years, you can carry them forward to offset tax liability in future years.

Under current rules, you can carry back NOLs to the two years before the loss year and forward for up to 20 years in the future. However, special rules apply to NOLs from 2001, 2002, and years before 1997. Generally, you first carry back NOLs, and then carry forward any unused amount. You may elect to forgo the entire carryback period if there is a tax benefit to electing carryforward only.

Nobody wants to incur a business loss, but at least the carrybacks and carryovers allow you to recover some tax benefit from your loss. For more information about NOLs, contact our office.

Caution:  This is an archived copy of our Tax Tip of the Week.  Tax laws change often.  Do not rely on this information without discussing the implications with Mr. Huddleston.