The year is not half over. However, if your company is off to a rough start, know that a silver lining may exist in the net operating loss (NOL) deduction.

The rules

A net operating loss occurs when a business’ operating expenses and other deductions for the year exceed its revenues. To qualify for the deduction, you must have business expenses in excess of your business income, though certain modifications apply.

Generally, once you incur a qualifying NOL, you can either carry back the NOL as far as allowable (typically two years) and then carry forward any remaining amount, or you can elect to carry forward the entire loss. Carrying back a loss can generate a current tax refund, which could free up cash flow during difficult times like these. Carrying forward a loss will offset income for up to 20 years in the future.

An example

Say your business incurs a $60,000 NOL for the 2016 tax year. You could choose a carryback period for its NOL of two years preceding the loss (first to the earliest year) and then carry forward any remaining amount for up to 20 years after the year in which it incurred the loss. Therefore, you might elect to carry back the entire loss first to 2014. If your 2014 net income was $6,000, you could use $6,000 of the NOL to offset this income and receive a refund of the tax you previously paid on that income.

From there, you would have $54,000 of remaining NOL to apply to the 2015 tax year, after which you would have whatever you had not used in 2015 to carry forward to 2017 and beyond until all the money is used or you hit the 20-year mark (whichever comes first).

Best way

This is just one example of how the NOL deduction might work. To get a better grip on the best way to handle it, please give us a call.