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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3000
Experience:  I've prepared all types of taxes since 1987.
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I was a farmer in Lexington Ky. from 1984 and showed my first

Customer Question

I was a farmer in Lexington Ky. from 1984 and showed my first net operaing loss of (1,855,000) and continued to show net operating losses through 1990 of total NOL of ($6,028,000). In 1991 I had a farm loss on schedule F of (217) but did show a net income of 2647. I had no further NOL even thogh did have some additional NOL for the farm but did show net income total. Am I correct I can deduct these losses through 2010?
Submitted: 10 months ago.
Category: Tax
Expert:  jgordosea replied 10 months ago.

Greetings,

 

Only the 1990 loss for the year would still be available to offset income in 2010.

Only the remaining balance not previously used would be available. Each NOL is applied in order from the oldest to the newest.

There may have been use of the 1990 NOL in prior years to 2010, so that there was possibly not a balance that could still be used.

 

The basic rules for using an NOL is that after 20 years, any remaining balance of that NOL is canceled.

 

If you stopped generating NOL for each year in 1990 then each year that you were filing the balance being carried forward will have to be reduced by any NOL that is more than twenty years ago.

 

For example, in 2007 you could only use any balance from the NOLs generated in 1987 or later and in 2008 you could only use any balance from the NOLs generated in 1988 or later.

 

Please ask if you need clarification or more discussion.

Thank you.

Customer: replied 10 months ago.

In 1987 I showed a ($5,608,000) thewrefore I still has avialable on my 2007 tax return, over (2,900,000) and in 1988 i had a (6,200,000) NOL and showed a NOL in 2008 of (2,750,000) therefore accroding to your answer the IRS was incorrect in disllowing the NOL??

Expert:  jgordosea replied 10 months ago.

Hello again,

 

Is that "In 1987 I showed a ($5,608,000)" the loss only from 1987 or is that also including some of the prior year NOL amounts?

 

In 2007 any amount from prior to 1987 would be canceled.

For example, if it was say 1,500,000 from 1987 year and the rest (4,108,000) from prior years only the 1,500,000 might still be available (to the extent that it was not used from 1998-2006) to carry into 2007.

 

Unfortunately, it will not be possible for me to give a definite answer in this forum as to what was and was not still available in a given year since that would require me to know (and better yet to see) all of the returns for the intervening years. For example, to know if any of the 1987 loss was still available in 2007 it will depend on how much was used in the years from 1991 through 2006.

 

Some of that 1987 loss probably was used to offset income in later years (which I am basing on the fact that you said the NOLs were "through 1990".)

 

But, based on the rules it does seem possible or perhaps even likely that there was still NOL to be applied to 2007 from the 1987 year.

 

If you did have 5,600,000 NOL in 1987 year and 6,200,000 NOL in 1988 year then you would have had to have income of more than about 14,500,000 net income in the other years from 1989-2006 to use all of that NOL.

 

On the other hand if there was only 600,000 additional NOL in 1988 that is being added to the total of all NOL amounts carrying forward (5,600,000 in 1987) then it we would have to look at how much was from 1987 alone.

 

For some to remain in 2007 the total net income from 1987-2006 will have to be more than the total of the NOLs that were incurred, not the carry forward total, from 1987-2006.

That is a but of a rough approximation but if you can look at all of the years from 1987-2006 and take the annual total income that may give you an idea if the denial is reasonable.

 

As some point it may be worthwhile to engage an experienced practitioner to review the years from 1987-2006 to confirm your suspicion that the denial is not proper and to be able to apply the general rules to your specific situation.

 

Please do continue to ask if you need more help on the general rules of applying the NOLs and the cancellation after twenty years of the unused balance.

 

Thank you.

Customer: replied 10 months ago.


I will come back you tomorrow with th e exact numbers and years in question

Expert:  jgordosea replied 10 months ago.

I will be glad to continue to discuss your situation tomorrow and guide you through the rules; but I must repeat that it will not be possible for me to give a definite answer in this forum as to what was and was not still available in a given year since that would require me to know and see all of the returns for the intervening years.

 

Thank you.

Customer: replied 10 months ago.


The exact NOLs for 1987 was $3,800,000, for 1988, $1,113,000, 1989,$659,000 and for 1990, $200,000. In 1991, I made +$2,700.


The total income for the period 1991-2007 was $2,500,000.It would seem I would still be able to use the NOL for 2007 as I did not use up the NOL from 1987??


Also any tax I may have paid for the 2007 period should now be refunded. I also should still have NOL available for 2008, 2009 and 2010??As I earned +2700 in 1991 my NOL then would end in 2010??

Customer: replied 10 months ago.

When will be in position to answer my question directed to you 9:39 EST this morning.Thank you.

Expert:  jgordosea replied 10 months ago.

Hello again,

 

From the figures given, it appears the total losses for the period was over 5,760,000.

 

IF the total income of the intervening years was 2,500,000 prior to any application of the NOL carry forward then it seems the 1988 loss would still be able to carry into 2007.

None of the 1988 NOL can carry past twenty years so it would be lost for later years.

 

From what you wrote there was not any NOL other than the 1990 loss of 200,000 that might be left to use in 2010. Likely that loss may have been used in part earlier, also.

 

From the years and amounts given it is the cancellation of carry forward after twenty years that was not applied to the amounts used in originally filing the returns that was not correct.

After twenty years each NOL can no longer be used even when some was not used.

None of the remaining NOL from 1989 or before can be used in 2010 since it is more than twenty years from the year the NOL was incurred.

 

If you have not discussed, and had these returns reviewed, by an experienced practitioner that would be the best course of action before you agree or appeal the audit result.

 

Hope that helps as you decide how to proceed with the audit result.

 

Please continue to ask if you need more clarification.

Thank you.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3000
Experience: I've prepared all types of taxes since 1987.
jgordosea and 5 other Tax Specialists are ready to help you
Customer: replied 10 months ago.


Thanks again.It will be interesting when I do have my appeals meeting in LA.


 


I will let you know the outcome.Certainly, based on my tax returns ( lucky I have keept just about all my returns since 1984) and you very complete step by step analysis and my review, my tax loss carry forward was still avaialble throgh 2007,2008.2009 and 2010.Since I made $217 in 1991 then I have no NOL in 2011.

Expert:  jgordosea replied 10 months ago.

You are quite welcome.

 

Please do come back.

If you want to list a new question later you can put my name in the question to alert others to let me answer.

 

Thank you for the opportunity to be of service .

 

 

Customer: replied 10 months ago.


One interesting question still.In then years 1987-1990 showed net losses from all operations, including farm therefore I had enough losses to cover any gross income and total gross income did not use up the losses for each 20 year period.In 1991 I lost income from farm operations but showed a nominal net profit of $2,000 total.Does that mean even though I showed a loss from farm operations but showed a nominal profit for the year 1991 I would not be able to use any prior losses to cover rincome for 2011?


 


Also since I was audited an incorrectly was "forced" to pay taxes for the years still under the tax loss carrry forward, 2007,2008,2009 and 2010, I assume I would be entitled to a refund + interest on the overpayment of taxes for those years.THX.

Expert:  jgordosea replied 10 months ago.

Hello again,

 

If your last NOL year was 1990 then no year would be less than twenty years ago, so you are correct that there is no possibility of NOL carryforward to 2011 from any NOL prior to 1990.

 

Remember that each NOL can only be used for up to twenty years and then that year NOL is lost and can not be used (even if it was not all used in the twenty years).

 

That means the 1987 NOL can not be used after 2007, the 1998 NOL can not be used after 2008, the 1999 NOL can not be used after 2009 and the 1990 NOL can not be used after 2010.

The assessment that was made for 2007 to 2010 may have been because some of the years could no longer be claimed as just outlined.

 

Each year NOL has to be carried forward separately and not just the total accumulated NOL applied to a given future year.

 

Refunds (or credit to another year) can only be given, by law, up to three years from the due date of the return being filed or two years from when the tax was paid. Whether or not you can get any refund of overpayment depends on the timing of the claim for refund as compared to the time the tax was paid.

 

Hope this clarifies for you.

Customer: replied 10 months ago.

 


If your last NOL year was 1990 then no year would be less than twenty years ago, so you are correct that there is no possibility of NOL carryforward to 2011 from any NOL prior to 1990.


 


This is your statement above. Clarify,.can I use any of the 1990 tax loss for 2011 as I did earn a nominal amount in 1991 although, by itself in my farm operations I did lose money.


THX.

Expert:  jgordosea replied 10 months ago.

Hello again,

 

An NOL can only be carried forward for twenty years form the year it was incurred.

 

It is not that the NOL can be used in up to twenty different years in the future.

NOL is not allowed to be used after twenty years have passed, even if not all of it was used up in the years that some was applied to reduce income. It does not matter if only one year had net income or how man years had net income.


2011 is more than twenty years from the NOL amount was incurred in 1990 so the NOL from 1990 can not be used in 2011

 

Similarly, any NOL amount from 1989 can not be used after 2009 because of the twenty year expiration of carry forward.

 

After twenty years the balance of unused NOL for a given year is lost and never used any more.

 

Hope that is more clear.

Thank you.

Customer: replied 9 months ago.

The one question that hasn't been answered is if I was audited for 2007 and 2008 in 2010-2011 and for 2009 and 2010 in 2012 and the audits were incorrect as my tax loss for 1987 was over $3.1mm and total income for the periods, after 1988 ( loss of $1.2mm ) 1989,over $600,00 and 1990, $120,000.Income from 2000-2007 was much less than $the $3.1mm loss in 1987 therefore no tax should have been charged to me but I did pay $2,500 after the audit for $2007.I also paid $1,700 in 2009 and $2,600 in 2010 when I still had losses available for 2009 from 1989 and also for 2010 from 1990.How do I apply for a refund for those years.THX.

Expert:  jgordosea replied 9 months ago.

 

If you have not discussed, and had these returns reviewed, by an experienced practitioner that would be the best course of action before you agree or appeal the audit result (if the audit is not yet completed)

 

Once the audit is complete for returns were already audited, one process is to ask for audit reconsideration. Follow the instructions in Publication 3598 and request an Audit Reconsideration See http://www.irs.gov/pub/irs-pdf/p3598.pdf

In the same manner that tax due is collected after an audit (or reconsideration) there will be a refund after the audit (or reconsideration) is complete.

 

Once you did pay the amount due in full you could file a claim for refund. If the IRS disallows your claim you will have the right to appeal at that time. See http://www.irs.gov/pub/irs-pdf/f843.pdf

 

Refunds (or credit to another year) can only be given, by law, up to three years from the due date of the return being filed or two years from when the tax was paid. Whether or not you can get any refund of overpayment depends on the timing of the claim for refund as compared to the time the tax was paid.

 

Engaging a practitioner experienced in audit reconsideration or claim for refund is suggested to improve your chances of success.

 

Hope this clarifies for you.

Customer: replied 9 months ago.

THX.

Customer: replied 8 months ago.

The one question that was not answered and I probably wasn't clear is that during the period of my last 20 year carry forward in 2010 ( loss from 1990) that was still avialable, $120,000, I did earn income from S/E but showed a net loss using the tax loss carry forward. Am I still required to pay Self Employment Tax or does the available tax loss wipe out any self employment tax.Does it belong on other income, line 6 and line 21 Schedule C??

Expert:  jgordosea replied 8 months ago.
Greetings,

The net operating loss is a negative entry as part of total income subject to income tax. It is entered on Form 1040 line 21 and is not entered on Schedule C.

The net operating loss is not an entry on the activity that generates self employment tax (such as Schedule C or Schedule E guaranteed payments).
The net operating does not reduce the amount that is self employment tax.
This is the same as if I had FICA or Medicare taken from wages for which I did not have to pay income tax due to an NOL carryforward.

Self employment tax is due the same whether or not there is an NOL.

Please ask if you need clarification.
Thank you.

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