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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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Can you use NOL carryback or carryfoward with losses from a

Customer Question

Can you use NOL carryback or carryfoward with losses from a first year S-Corp? Can you carryback/forward losses resulting from sect 179 expense or Bonus depreciation?
Submitted: 2 years ago.
Category: Tax
Expert:  R. Klein, EA replied 2 years ago.

Randalltax :

You have a bunch of things in your question which don't male sense.

Randalltax :

First off, you can't have any Section 179 if you have a loss or if the Section 179 carries you into a loss. Section 179 can only be used when you have prodits to reduce, but not below zero.

Randalltax :

You can have regular depreciation expenses take you into a loss situation without a problem.

Randalltax :

(that was PROFITS, not prodits)

Randalltax :

A loss from activities in an S-Corp is strictly limited to the basis or capital you put into the company. If your S-Corp loss exceeds your basis, the loss is disallowed until you add more capital to increase the basis. Keep in mind that a loan does not increase basis.

Randalltax :

Finally, a loss from an S-Corp by itself does not mean you necessarily have an NOL. You must determine how much of the loss qualifies for NOL treatment by using Form 1045, Schedule A to calculate the amount of NOL that can be carried to another year.

Randalltax :

The loss from the S-Corp is first offset against ordinary income and other tax deductions.

Randalltax :

If you do have an NOL, then it first is carried back 2 years, then forward up to 20. You can make an irrevocable election to forego the carryback period.

Customer:

Ok... so my basis in company is 350K, and my first year S-Corp loss "(with all bonus depreciation) is 250K.

Customer:

So, if while going through Form 1045, Schedule A there is a NOL than do I need to amend my previous tax return? or how does that work

Customer:

Do I need to show anything for this years return?

Randalltax :

OK. If you are using bonus depreciation, it is OK, but it is rather short-sighted. You are will to take an extra write-off against already a low marginal tax rate. Wouldn't you rather save those expenses and reduce future income when you are in a higher tax bracket?

Randalltax :

It's a "some now" or "lot more later" scenario.

Randalltax :

You say your S-Corp lost 250K. (I'm assuming for 2011). What was your POSITIVE income in 2011?

Customer:

on my personal 1040 (2011) my line 41 is currently showing -80K

Customer:

in 2009 I was a schedule C and paid around 30K in taxes

Randalltax :

OK. Sounds like you have an NOL. Probably won't carry the full 80K over.

Randalltax :

To do this on the return, you first file the 2011 form 1040 like normal

Randalltax :

Then you must complete a 1045. You don't amend the prior return.

Randalltax :

The 1045 is your claim form for the refund. It also sounds like the entire NOL will be used up in 2009, although a lot of your tax bill was from SE Tax which cannot be reduced.

Randalltax :

Form 1045 is not an easy form if you have never done it. It is advised you have a tax pro look at it.

Customer:

Ok, so if SE tax cannot be reduced, than would it be wise for me to not take bonus deprecitiation on all of my assets, so I reduce my NOL

Randalltax :

Could be. You'll need to do the math...regular depreciation will be deducted for the next 5-15 years depending on the assets. Will you be in a higher tax bracket then?

Customer:

Or, should I still maximize and than have the left over amounts be carryied forward towards future income

Randalltax :

Remember that losses in an S-Corp DON'T affect SE tax. The only thing that affects SE Tax in an S-Corp is your actual salary.

Randalltax :

As for current year losses, remember that you are reducing income that is in the 10% and 15% and possibly some in the 25% marginalk tax brackets!

Customer:

So, let's say that on my 2009 tax return, my line 44 (tax) was 5K, and I have a total of 80K in NOL.. can I use the 5K towards 2009, and than be left with 75K to be applied towards future years

Randalltax :

Not quite the way it works.

Randalltax :

NOL does NOT reduce tax dollar for dollar. It reduces income subject to tax. The NOL amount, let's say it's $70K, goes on Line 21 of the 2009 return lowering the taxable income.

Randalltax :

If you were to have a $70K loss, how much would your AGI (line 37) end up being?

Randalltax :

in 2009

Customer:

it would be around 10K -20K if you include $70K on line 21

Customer:

and eventually be down to below zero because of the itemized deductions

Customer:

So you cannot choose how much of the NOL to be applied to previous years

Randalltax :

Then your income tax portion would drop to zero, and you would use up the entire NOL in 2009 with nothing to carry forward past that point.

Randalltax :

You would get a refund of anything on Line 44 and nothing more.

Randalltax :

So ultimately, the answer is YES, you can take an NOL to another year, but it is a business decision as to whether that's soemthing (or how much of the something) you want to do.

Customer:

Ok, I see, so it would not benefit me much to maximize since I cannot reduce my 2009 SE tax... it would be better for me to do regular depreciation

Randalltax :

You would be reducing taxes from 2009 that are based on a 10% tax bracket!

Customer:

when I do the numbers, I still get a loss even with regular depreciation but only about 10K

Randalltax :

Seems a waste of a good expense that can potentially reduce tax in the 25% bracket (assuming you are profitable soon)

Randalltax :

You can take bonus depreciation on some items and not all items. Can't do Section 179 for sure.

Customer:

So what happens to the loss if I do nothing... do I just lose it?

Randalltax :

If you have an NOL, you must elect to carry it back or forward.

Randalltax :

If you have just a small loss, it still offsets your regualr income.

Randalltax :

If your regular income is in the $150-180K range, you are reducing tax in the 25% bracket there in 2011

Customer:

Ok, I got it... thanks for your help...

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
R. Klein, EA and 8 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
If I can carryback losses upto 2 years than how will I allocate the 70K? Do I file one 1095 for 2009 and than look at line 41 again, and whatever the loss is, I file another 1095 for 2010?
Expert:  R. Klein, EA replied 2 years ago.

Based on what you told me....that your positive income in 2009 is about 80K, there is nothing of the NOL that will be left after 2009. You MUST allocate the full amount to 2009. You cannot pick and choose how to apply the NOL.

 

You file only one Form 1045. Step one is to calculate the NOL amount that goes to 2009. Step two is to calculate the difference in tax the NOL makes by applying it as though the return originally included the loss in 2009.

 

Even though the itemized deductions and exemptions takes you below zero in terms of income, that just means no tax is computed.

 

Example after NOL applied

Salaries & Wages ...............$80K

NOL...................................... -70K

 

AGI...........................................10K

 

Deductions..............................20K

Exemptions.............................7K

 

Total taxable...........................-17K

Tax on this amount.................. 0

 

Since your AGI is above zero, the NOL was used up entirely.

 

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