50 Percent Loss

Today TaxMama hears from Andrew in the Tax Parlor, who tells us. “I operate an S corporation. In the 1st year (2005), the S corporation had substantial income, and I reported it on my 2005 tax return. This year (2006) it has a loss that’s larger than my whole family income. May I report 50% of my S corporation loss on my personal tax return this year; and report another 50% loss next year?”

Dear Andrew

I love the question. It’s so delightfully naïve!

But, ouch! That is a lot of money to lose if this is your main source of income.

Please, re-evaluate your business plan and make changes for this year!

OK, now, report all your loss from the S corporation this year.

If, after the software chugs along and does its computations, there’s a loss you can’t use, you end up with something called a Net Operating Loss or NOL.

You can use that loss in coming years to offset income from personal or business sources.

You can carry the loss back to 2 years earlier and get a quick refund by using the loss in 2004. Or if you include a statement (called an election to forgo the carryback) with your tax return, you can use the loss next year.

I hope this helps.

And remember, you’ll find answers to lots of questions about net operating losses and other tax information, free. Where? At TaxMama.com

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