Corporate Net Operating Losses

Today TaxMama hears from Monty in the TaxQuips Forum, who needs help. Let me paraphrase his question. “When a corporation has net operating losses (NOL) for two years in a row, 2008 and 2009, how do you handle carrying back the NOLs?”

Dear Monty,

When you have a large net operating loss, you may be permitted to use that loss to get refunds from taxes the corporation paid in the good years.

Starting with the 2008 NOL, carry it back as far as you are permitted.  If you have a big enough loss from 2008 that you could not use it up in 2005 and 2006 – you carry the balance to 2007. See if you end up using it all up.

That’s what you need to do first.  The corporate application for a tentative refund form,  Form 1139 has room to use the NOL for three years.

THEN, if there is still anything left, it goes forward to 2008 and 2009 (where you don’t need it), then on to 2010.

 As to the new loss in 2009 – if there is still any income left in the earlier years that has not been fully reduced by 2008 NOL carrybacks, yes, prepare a new Form 1139. You would prepare a new Form 1139 for each year where losses originate.

 If there are no years to which you can carry losses back, you must make an election to forgo the NOL carryback – and send the losses forward.  Be sure to attach a worksheet to the future corporate tax returns to show the source of the losses and how much was used up in each year.

Hopefully, the company will turn around and start making profits!

Pay attention to state rules. Your state may not even allow the use of net operating loss carrybacks or carryforwards. But where they do, remember to claim those refunds as well.

Also, be aware that there are different rules for NOLs, when it comes to personal tax returns. You have some extraordinary flexibility. You may select the year you start using the NOLs, anywhere from 2 years to 5 years backwards.

And remember, you can find answers to all kinds of questions about net operating losses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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