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Can a 1040 loss be carried back to prior years?

Can a 1040 loss be carried back to prior years?
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9/28/2012
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,265
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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It depends on the type of loss.

If you have what the IRS deems a net operating loss, it can be carried back 2 years and then forward 5.

To carry it back you either use an amended tax return or form 1045.

You can also elect NOT to carried it back at all, but rather to carry it forward for 20 years.

Here's the IRS website that gives you the guidelines:

http://www.irs.gov/publications/p536/ar02.html#en_US_2011_publink1000177421



And here's an example they give, to help you calculate:

Martha Sanders is a self-employed contractor. Martha's 2011 deductions are more than her 2011 income because of a business loss. She uses Form 1045 to carry back her NOL 2 years and claim an NOL deduction in 2009. Her filing status in both years was single. See the filled-in Form 1045 later.

Martha figures her 2011 NOL on Form 1045, Schedule A (not shown). (For an example using Form 1045, Schedule A, see Illustrated Form 1045, Schedule A under How To Figure an NOL , earlier.) She enters the $10,000 NOL from Form 1045, Schedule A, line 25, on Form 1045, line 1a.

Martha completes lines 10 through 25, using the “Before carryback” column under the column for the second preceding tax year ended 12/31/09 on page 1 of Form 1045 using the following amounts from her 2009 return.

2009 Adjusted gross income $50,000
Itemized deductions:
Medical expenses
[$6,000 − ($50,000 × 7.5%)] $2,250
State income tax + 2,000
Real estate tax + 4,000
Home mortgage interest + 5,000
Total itemized deductions $13,250
Exemption $3,650
Income tax $4,544
Self-employment tax $6,120


Martha refigures her taxable income for 2009 after carrying back her 2011 NOL as follows:

2009 Adjusted gross income $50,000
Less:
NOL from 2011 −10,000
2009 Adjusted gross income after carryback $40,000
Less:
Itemized deductions:
Medical expenses
[$6,000 − ($40,000 × 7.5%)] $3,000
State income tax + 2,000
Real estate tax + 4,000
Home mortgage interest + 5,000
Total itemized deductions −14,000
Less:
Exemption − 3,650
2009 Taxable income after carryback $22,350


Hope this helps.

Lane

(Positive feedback is appreciated, BUT if you have further questions, come back here for clarification, so you won't have to pay for another question)

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,265
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Customer reply replied 5 years ago


Thanks. I think this helps. My wife is self employed and I have been out of work since 2008 and collected severance in 2009. Her business cash flows well and keeps us in our home etc but operates at a loss in this economy. So I think I can use 1040 losses (even on a combined basis) currently to carry back. Mark


Yes, as a sole business owner, she should use schedule C. this is where she'll generate a loss, then the loss flows through to your 1040.

... and then can reduce or completely offset other income ...

... and as you've figured out, used on other years.

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Lane
Lane
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Category: Tax
Satisfied Customers: 13,265
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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