In the current economy, it’s safe to say that many small businesses might have chalked up a net operating loss (NOL) during the last year or two.
If that’s the case, the New Jersey Society of Certified Public Accountants (NJSCPA) advises that there is one potential tax deduction that you should not miss.
But it may be necessary to call in an expert to determine if you are eligible:
Calculating a Loss
Determining whether you have a loss is easy enough. Simply subtract the business expenses from your income and you’ll be left with your taxable income for the year. But what happens if the money you spent running your business is greater than your business income?
Enter the NOL
In this situation, the business is considered to have a net operating loss. Generally, individuals who are sole proprietors of a business can use NOLs. S corporations and partnerships cannot, but their shareholders or partners may be able to apply this loss to their own individual NOLs.
What Constitutes an NOL?
Losses that are generally eligible to calculate an NOL must be a result of excess expenses related to a trade or business. It may also include casualty or theft losses, expenses for moving to a new job location, your share of partnership or S corporation operating losses or rental property losses. Personal expenses, tax exemptions and capital losses are examples of what you cannot deduct.
A Simple Example
Your business earned $100,000 last year, however, that was a drop from your past earnings due to the rough economy. Your expenses for running your business during the year were $150,000, because that’s what you spent in the past when the economy was in better shape and your sales were higher. So, on the tax returns that you’re preparing for 2009, you would be able to deduct your losses. However, since you lost $50,000 more than you made, you may be able to use those additional losses in other tax years, deducting them against your past or future earnings as an NOL.
Putting It to Work
We’ve simplified NOLs here, but there are complicated rules on how to apply them, including a list of expenses and deductions that don’t count toward the NOL. As a general rule, it’s useful to remember that they are called net operating losses for a reason. Any expenses not related to the operation of a business probably won’t apply.
Carry Back? Carry Forward?
What happens if you do have an NOL? Once again, there are complicated rules involved in answering that question. The rules help determine, among other things, in which years the NOL can be applied. Generally, you would begin by applying your losses to your previous two years’ tax returns, although this rule can be waived under certain circumstances.
If losses remain after you’ve applied your NOL to your two previous years’ income, you can then carry forward the losses for up to 20 years after the original NOL occurred. For losses arising in 2009, you can elect to carry them back for three, four or five years (instead of the normal two years). However, the rules to do this can be complicated.
Your CPA Can Help
If you’re uncertain about whether your company qualifies as having an NOL, or about any tax issue facing your business, remember that your CPA has the expertise to offer the advice you need. He or she can also help you decide how to navigate an uncertain economy or work with you on your business or personal financial planning issues. Turn to him or her for trusted business advice whenever you need it.
If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.
For more information on various personal financial matters, visit the NJSCPA’s public service website at www.MoneyMattersNJ.com. While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email newsletter to receive valuable personal financial planning advice throughout the year.
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