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Net operating losses: use them or lose them

February 25, 2010

Can you have no taxable income but still pay income tax? Yes, you can, if you look at more than one year at a time. That's why the tax law allows you to carry net operating losses for other years - normally back two years and forwards 20 (a temporarary provision allows 2009 losses to be carried back up to five years).

But you can screw this up, as a Georgia taxpayer demonstrated in Tax Court yesterday. After good years in 1999 and 2000, with taxable income of $97,291 and $101,123, he ran into tough times. His 2001 and 2002 returns showed net operating losses of $26,628 and $38,345.

But he made one little mistake: he didn't get around to filing 2001 and 2002 returns until 2007. He claimed the losses against his 2003 return, which he filed in September 2006.

The tax law normally makes the 2-year NOL carryback mandatory. Taxpayers can waive the carryback and elect to carry it forward, but you have to do this on a timely return. You have three years after the due date of a loss year return to carry back its NOLs. By waiting until 2007 to file the 2001 return, he missed the three year deadline, so he didn't get the refunds he could have for 1999 and 2000. Even so, the tax law considers the loss to have been carried back anyway, absent a had timely carryforward election, so there was no loss left to carry forward.

The Moral? If you have a loss year, that doesn't mean you should ignore your taxes. It means you should get them done sooner to make sure you get your loss carryback refund.

Cite: Davidson, T.C. Memo 2010-38

Tags: Net operating loss.NOL.tax court.