Monday, February 16, 2009
What To Do With a Business Loss
I saw today the following quote about tax cuts in the new stimulus bill: "Money-losing small businesses could use their losses to offset profits made in the previous five years, instead of two, making them eligible for tax refunds. The provision is limited to businesses with annual revenues under $15 million..."
Naturally, given the economic downturn, many of us "indies" are experiencing business losses for the first time. Does this new provision apply to sole proprietors? i.e. Can losses in 2009 offset taxes due for 2008?
If this is a dumb question, answer me privately. If you think it might be useful to others, maybe it's good for your blog.
There is a procedure to handle losses. In tax jargon it's called an NOL -- an acronym for "net operating loss." It's complicated and depends on many elements of someone's tax return. But what it boils down to is: If your entire income [not just your indie business] with lots of adjustments and modifications results in a loss you may carryback that loss to previous years or carry it forward to future years.
You must make the backward/forward choice by looking at your past and future income as well as into your crystal ball -- with the help of your accountant, of course -- and determine which direction would save you the most tax money.
This procedure has been around for a very long time. The amount of time to go back and forward has changed over the years. This is a complicated exercise and must be done by a knowledgeable tax pro.
Thanks for asking a good question.