Important – Net Operating Loss Deduction!
Don’t Overlook the Net Operating Loss Deduction
Important:- Net Operating Loss Deduction – The carryover of a net operating loss is a valuable tax deduction in that it allows an operating loss from the current tax year to offset income from previous or future tax years. This is important because it one of the only means by which the business income taxes owed in any given year can be affected by anything other than the income, tax deductions or tax credits earned in that year. While the rules governing the carryover of a net operating loss are complex, the use of this tax deduction can amount to a significant tax savings, when applicable.
The following information summarizes some of the specific guidelines governing the use of the net operating loss deduction:
• A business has a net operating loss in any given tax year when the business expenses exceed the business income. However, the calculation of a net operating loss follows slightly different rules than the calculation of business income.
• Although certain items can normally be deducted on a business tax return, they cannot be used for the purpose of calculating a net operating loss. Items that cannot be used to calculate a net operating loss include, but are not limited to: net operating losses from other years, personal exemptions, non-business losses, capital losses and non-business deductions such as contributions to charities, medical deductions and deductible IRA contributions, among other things.
• Net operating losses are usually carried back to offset a prior year’s income before they are carried forward. However, a business can elect not to use the carryback option.
• A net operating loss can normally be carried back for two years prior to the year in which it is incurred and carried forward for 20 years after it is incurred.
• If a net operating loss is not used within the allowable carryover period, either forward of back, then it is lost.
It should be noted that the IRS will examine the net operating loss deduction with the same scrutiny that it examines other tax deductions. Since the carryback of a net operating loss involves tax years other than the current year, care should be taken to ensure that all tax returns filed during the carryback period have been filed and accurately reflect the income of the business during that period. Because tax law as applies to the use of carryover of a net operating loss is complex, it may be advantageous to enlist the services of a qualified tax professional when claiming this deduction.
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