This week we are going to tell you about something that can really put some money in your pocket when it comes to taxes. We are going to talk about Net Operating Losses. You will often hear this term shortened to NOLs, and this is how we are going to refer to them.
So, what is a NOL? An NOL has to do with your Adjusted Gross Income on your tax return. Your Adjusted Gross Income is calculated by adding up all of your income from all possible sources. This includes things such as wages, self-employment income, rental income, Social Security income, farm income, unemployment, interest and dividends, and any other income you may have. It also includes any losses from a business or the sale of stock. So if you loose money in a business or sale of stock, you would subtract that amount from the total of your other sources of income. An NOL occurs when your Adjusted Gross Income is a negative number, which means you lost more money than you made in a given year. NOLs are most commonly caused by the day-to-day operations of a business or an investment that has lost money. That is why it is called a net operating loss.
You may be wondering how a loss is a good thing, or how loosing money can save you money. Well, it’s obviously not the ideal situation; but the thing you need to know is that if the loss is big enough, you can take that loss and carry it back to previous years and get some of the taxes you have paid back; or you can carry it forward to future years of income to avoid paying future tax. So let’s say you had a profitable year in 2009 and owed $20,000 in taxes. Then in 2010, you had a bad year and lost $100,000. This would create a NOL. You could then carry back the $100,000 loss to 2009 and get back some or all of the $20,000 in taxes you paid. This is called a Carry Back.
A Carry Back can save you thousands of dollars in taxes. If you want to learn more about NOLs and Carry Backs, check out our CD and/or MP3 “Understanding NOLs and Audits,” or contact us for a free 1-hour consultation. If you own a business and have lost a lot of money, this could really help you save money on taxes and get back some money you have already paid.