Reply #6: A 5 year carryback on an operating loss means .... [View All]

[FrenchieCat]

that if a taxpayer generates a loss in a current year that is too big to all be used in the current year, one can either carry it back to prior years or elect to forgo the carry back and carry it forward into future years.

In otherwords, if one has a year in where they claimed a profit and paid taxes on it, one can take the current loss and apply it to that year. The rules normally states that one carries back to the oldest year eligible first and work towards the present until the loss is totally used up. What is not used up can than be carried forward to future years. In the past, the carryback period was 3 years, and it appears that it is being extended to 5 years. Operating losses are applicable to businesses, large and small, including small businesses which may be set up as sole proprietorship/Schedule C, partnerships and small corporations.

Example: You operate a small Mom & Pop grocery story. In 2008, you report a loss of $32,000...which cancels out your 2008 tax bill and leaves it at zero.

But say you only needed $20,000 to get to a zero tax bill....
this means that you have $12,000 left as a loss....
which then can be carried back to losses in prior years, starting at tax year 2003.
If you had previously reported profits, and paid the appropriate tax, you can now apply the $12,000 and reduce your profits, and therefore reduce your taxes accordingly and get a refund. If the entire $12,000 isn't required to reduce your 2003 taxes down to zero, you then can apply whatever is left to 2004...and continue to move forward, and so forth and so on.