Net Operating Loss

If you are a sole proprietorship and your business suffered business losses, it is possible for you to use those losses to claim a business operating losses for a tax break.  Congress created this right to help struggling businesses and can be used to offer your some tax debt aid.

A sole proprietorship can claim a business operating loss on their annual individual tax return.  These types of loses are called net operating losses.  This occurs when a business expenses and deductions are more than its total income.  If this is the case for you then you can use a net operating loss to offset your other income to lower your total tax.

Many businesses don’t realize they have this option.  The rule is very complex.  It’s best to talk to an account, tax attorney, or a tax relief service to take full advantage of this rule.  This can be very helpful to an individual or business who owes back taxes to the IRS.

You can take a net operating loss in the year that it occurs.  If the losses exceed your total income in the year that you want to use it, you can amend up to five past tax returns.  If you still have more unused losses to use, you can carry it forward up to 20 years.  So in summary, you can use the loss in the year that it occurs, you can apply it up to five years going backwards and up to 20 years going forward.  You can’t use the entire net operating loss in any given year if it’s application would wipe out your entire income and take you below zero.  That is why you are then able to go back 5 years and go forward 20 years to apply the losses until it is all used up.

So here is an example of how it works.  Say you were in business for 4 years.  In year two and three you finally made a profit and in the last year you suffered $50,000 in debt.  Your wife also worked and made $40,000 a year.  So that year, your gross family income was $40k.  You can apply $40K of your $50K net operating losses against your $40K income for that tax year.  The remaining $10k in net operating loss can then be applied on the tax return going back five years.

So if you have any back tax and owe money to the IRS, review your records and see if you can take advantage of this rule.