Being able to carry net operating losses forward and backward is a significant benefit the tax code provides businesses. However, the process for claiming and substantiating the deduction can be intimidating because there are specific rules that apply, and applying them to a taxpayer’s specific situation can sometimes be complicated.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: What is an NOL?
A: For the tax year in question, a net operating loss (NOL) is defined as the excess of deductions over gross income, subject to certain modifications [§172].
Q: What happens with the NOL in a C corporation when it becomes an S corporation?
A: Generally, the NOL is lost as the unused NOL cannot offset S corporation income and cannot be passed through to the shareholder(s).
Q: Are all NOLs now carried forward since there are no carrybacks?
A: Generally, yes; however, NOLs from farming losses and casualty insurance company losses can be carried back two years.
Q: Going forward, can a taxpayer pick and choose the amount of the NOL to utilize?
A: No, the NOL must be carried to the earliest year allowed, and then successively to the next earliest year, until the loss is used up.
To learn more about navigating net operating losses and carryforwards/backs, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
