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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I own a small S-corp and was overwhelmed by the demands of

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I own a small S-corp (Minnesota) and was overwhelmed by the demands of business and got way behind on filing the 1120S. I have not received any IRS notices but I am now filing old returns starting with 2003. I have a question about carrying losses forward.

In 2003 I paid a (major) payroll service to process paychecks for me plus two part-time employees with very few hours ($44,000 salary for me and under $2,000 combined for the PT'ers). The payroll service deposited the payroll taxes, filed forms, etc.

I did not file 2003 business taxes (1120S) because it was too confusing and I was too crazy busy, but I did file my 2003 personal taxes (1040), married filing jointly with my husband. Now I have finally prepared my 2003 form 1120S and mailed it, showing a business loss of a little over $11,000.

My understanding is that now I can carry that $11,000 loss forward to 2004, but I don't know how to carry the loss forward - on what form for 2004?

I am just finishing my 2004 business taxes (1120S) which shows a profit of about $12,000 for my S-corp. For 2004 I filed my husband's personal taxes (1040) married filing separately but did not file my own personal tax forms. However, the payroll service again did my payroll for 2004 (only $31,500 salary for me and under $2,000 again for one part-timer). So if I can carry through the $11,000 loss from 2003 to offset the $12,000 profit in 2004, my personal taxes should come out okay for 2004.

How do I pass through this loss from 2003 to 2004? What form, and what line do I report it on? Thank you so much!
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on the Other income line of Form 1040 or Form 1040NR

 

You must attach a statement that shows all the important facts about the NOL. Your statement should include a computation showing how you figured the NOL deduction. If you deduct more than one NOL in the same year, your statement must cover each of them.

 

There is no special form for figuring your net operating loss carryforward. You simply enter it on the other income line. And submit with the statement.

 

You have to track it yourself. If you are using software such as TT, TT will carryit forward for you. You can get prior year TT software at amazon.com,that is older than 3 years.

 

If not, you can use section B of form 1045 to figure and document your carry over.

 

Note, if you file a timely return, and have net operating loss, you can even carry back. So you have lost the carry back option for prior years, but for 2008, if you have a net operating loss you can carry back.

 

 

Customer: replied 5 years ago.
Thank you so much. I have a few followup questions, and I am happy to pay a bonus if these are all answered satisfactorily.

= = = = = = = = =
1040 Questions:
= = = = = = = = =

For the 2003 S-corp loss, I see that Line 21 of the 2004 1040 is Other income, so that is where I will put the NOL. You said: "Your statement should include a computation showing how you figured the NOL deduction."

When I attach this statement, do I just write a brief description including the Tax ID number of my S-Corp and the loss amount stating that it comes from the 2003 1120S? Or should I also attach a copy of the 2003 1120S to this statement? Or include a summary computation (from the 1120S) on the same page as the brief description?

On which line of the 2004 1040 do I write the approx. $12,000 S-corp profit for 2004 (which I will be offsetting with $11,000 of S-corp loss for 2003)?

= = = = = = = = = = = = = = =
NOL Carry forward question:
= = = = = = = = = = = = = = =

Also, since my payroll service deducted federal and state taxes for me, it is possible that deducting the entire $11,000 of 2003 NOL will cause me to calculate a refund amount on the 1040 for 2004. (I haven't finished the 1040 yet.) But since I am filing my 1040 for 2004 more than 3 years late, I understand that I would forfeit that refund. If so, can I deduct only part of the 2003 S-corp NOL (for example, to bring me to a 1040 refund amount under $50, which I would forfeit), and then carry over the remaining 2003 S-corp NOL to my 2005 form 1040?

= = = = = = = = = = =
About S-corp losses:
= = = = = = = = = = =

I recall reading something about not showing an S-corp loss for more than 2 or 3 years in a row because the IRS will conclude the business is a hobby / tax dodge. However, if I did have an S-corp loss for 3 or 4 years in a row, but during those years I was paying myself a salary (Compensation of officers) that is larger than the loss each year, this would not look like a hobby to the IRS, would it?

Thank you!
Expert:  Ed Johnson replied 5 years ago.

When I attach this statement, do I just write a brief description including the Tax ID number of my S-Corp and the loss amount stating that it comes from the 2003 1120S? Or should I also attach a copy of the 2003 1120S to this statement? Or include a summary computation (from the 1120S) on the same page as the brief description?

 

ANSWER: Just use a brief statement about where it comes from, including the name of the business and TAX ID number. The IRS may request additional evidence later. But, they do not like to get large packets at first. A simple note will do. Put the note on an a full sheet of paper, and make your coments less than half a page if you can. Identify the note at the top with your name and SSN, tax year, then on second line RE: name of company, company tax id, net operating loss carryover from tax year____.

 

S-Corp Profit. You should be doing a schedule E for 2004, and then carry any income or loss to line 17 of form 1040. (current year income and losses) Carry over losses still goe on the other income line.

 

Your QUESTION: since my payroll service deducted federal and state taxes for me, it is possible that deducting the entire $11,000 of 2003 NOL will cause me to calculate a refund amount on the 1040 for 2004. (I haven't finished the 1040 yet.) But since I am filing my 1040 for 2004 more than 3 years late, I understand that I would forfeit that refund. If so, can I deduct only part of the 2003 S-corp NOL (for example, to bring me to a 1040 refund amount under $50, which I would forfeit), and then carry over the remaining 2003 S-corp NOL to my 2005 form 1040?

 

ANSWER: I am sorry the IRS will expect that you apply the whole NOL in succeeding years until it is used up. If you do not, then the IRS refigures it for you or asks you to submit an amended return.

 

You state: recall reading something about not showing an S-corp loss for more than 2 or 3 years in a row because the IRS will conclude the business is a hobby / tax dodge. However, if I did have an S-corp loss for 3 or 4 years in a row, but during those years I was paying myself a salary (Compensation of officers) that is larger than the loss each year, this would not look like a hobby to the IRS, would it?

 

ANSWER: This is a general rule that does not hold true in every case. They may deside it is a hobby, but not necessarily so in your case. I have a client for example that lost money on his rental unit for 5 years. During an audit, the IRS added back in the depreciation, and that showed a profit, so he was still allowed to treat the residence as a rental and take rental deductions.

 

The actual rule of thumb is: If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby.

 

If you cannot meet the 3-out-of-5 year rule (3 years of profits in a 5-year period), you can still prove your profit motive using the following nine factors:

  1. You carry on the activity in a businesslike manner,
  2. The time and effort you put into the activity indicate you intend to make it profitable,
  3. You depend on income from the activity for your livelihood,
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
  5. You change your methods of operation in an attempt to improve profitability,
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
  7. You were successful in making a profit in similar activities in the past,
  8. The activity makes a profit in some years, and how much profit it makes, and
  9. You can expect to make a future profit from the appreciation of the assets used in the activity.

Reference: http://www.irs.gov/pub/irs-pdf/p535.pdf

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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