Being able to carry net operating losses forward and backward is a significant benefit the tax code provides businesses. However, the process for claiming and substantiating the deduction can be intimidating because there are specific rules that apply, and applying them to a taxpayer’s specific situation can sometimes be complicated.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: What is an NOL?
A: For the tax year in question, a net operating loss (NOL) is defined as the excess of deductions over gross income, subject to certain modifications [§172].
Q: What happens with the NOL in a C corporation when it becomes an S corporation?
A: Generally, the NOL is lost as the unused NOL cannot offset S corporation income and cannot be passed through to the shareholder(s).
Q: Are all NOLs now carried forward since there are no carrybacks?
A: Generally, yes; however, NOLs from farming losses and casualty insurance company losses can be carried back two years.
Q: Going forward, can a taxpayer pick and choose the amount of the NOL to utilize?
A: No, the NOL must be carried to the earliest year allowed, and then successively to the next earliest year, until the loss is used up.
To learn more about navigating net operating losses and carryforwards/backs, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.