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Stephen G.
Stephen G., Sr Income Tax Expert
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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This question relates to US taxes. I owned a dental office

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This question relates to US taxes. I owned a dental office that I sold in 2006. One of my employees sued me in 2004, the suit was settled in 2008. Therefore, I had expenses relating to this suit in 2007 and 2008 when I no longer had any income to offset it. Can I deduct the expenses that I paid in 2007 and 2008 against the income from 2006 or against the capital gain of the sale of the business in 2006?
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

The 2006 tax year is closed as far as amending returns.

Stephen E. Grizey :

If the expenditures you made because of the suit were related to payroll, ie. the settlement expenditures & legal costs, then I would consider filing a business schedule C for those years by amending your 2007 & 2008 returns. The statute of limitations on 2007 will expire in 2011 on the comparable date in 2008 that you filed your return for 2007, including extensions, or 4/15/2008 if you filed your return before 4/15/2008.

Stephen E. Grizey :

You'll need to tell me a little more about the nature of the suit and settlement before I can give you my final recommendation as to what to do............

Customer: replied 3 years ago.
The suit was what is now very fashionable: a frivolous employer practices lawsuit. The employee initially asked for $250,000 and settled for $30,000 in 2008.
Expert:  Stephen G. replied 3 years ago.
OK, well I guess we're out of fashion as being self-employed it is difficult to sue ourselves.......

I presume that no insurance covered you for this?

Why were there payments is both 2007 & 2008......legal in 2007 & then legal + settlement in 2008 ? I'm asking to see if there's some way to limit an amended return to 1 year, ie 2008.

How much is in 2007, as depending how much it is, you might have to claim it in 2007 as if you put it all in 2008 & the IRS were to even look at it and say 2007, then the statute would have run on 2007 by then.

There could be other issues also; do you have sufficient other income to absorb these expenditures in 2007 & 2008?
Customer: replied 3 years ago.
I did not have insurance to cover the lawsuit. I had expenses relating to this suit every year from 2004-2008, these were lawyer fees. The attorneys dragged it out as best as they could to maximise the paperwork, bully me and befuddle the court. In 2008 I had the lawyer fees and the settlement. That is exactly my problem in that I do not have enough income in 2007 and 2008 to take these expenses against.
Expert:  Stephen G. replied 3 years ago.
If you have excess expenses over income in 2007, you would have to make the net operating loss (NOL)computation to see if you in fact have an NOL for 2007; then if you do you would have to amend your 2007 return before the statute of limitations expires in 2011 (3 years from when you filed in 2008) & elect to carry the NOL forward as the general rule is that you have to carry it back 2 years before you can carry it forward, but those years (2005 & 2006) are closed...<<<<<<<<<<<<<<<<<<<<<<<<<<
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Then you would have to do the same thing for 2008, & again elect to carry the NOL forward; then you could continue to use the loss against future income until it was fully absorbed.<<<<<<<<<<<<<<<
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The computations can get pretty tricky, so you would probably need some professional help to work it all out..<<<<<<<<<<<<<<<<<
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Obviously, for $30,000 + attorneys fees, there's enough to warrant checking it out. Furthermore, it may be possible to defer the expenses from 2007 to 2008 on the theory that the case was not settled until 2008 so that you didn't deduct the expenses you incurred until they were finally determined.<<<<<<<<<<<<<<<<<<<
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You would have to discuss this with your tax preparer & I would recommend that you use a CPA as then you would at least be assured that he/she knew what they were doing; if not, they shouldn't accept the assignment; you should ask up front if they know their way around NOLs & the required "ordering" computations..<<<<<<<<<<<<<<<
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That's about all the guidance I can give you in this format...<<<<<<<<<<<<<<<<<<<<<<<<<<<<
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Please remember to "Accept", it is the only way we get credit for our work. Feedback, if you have time, and bonuses, where you think they are warranted, are always most appreciated..<<<<<<<<<<<<<<<<<<<
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I'll be happy to answer any follow-up questions that you may have..<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
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Edited by Stephen E. Grizey on 2/2/2011 at 2:51 PM EST
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4047
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and other Tax Specialists are ready to help you

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