My client is a small C-Corporation (two shareholders) that started doing business in 2010. Up until 2014 tax year, all years were resulting in losses and therefore they generated NOLs for three consecutive years. Unfortunately an election to forego the carryback period was never made on all three of those returns. I am concerned that the IRS may disallow carryforward because the election was not made. It looks like 2014 may result in a profit and the corporation will now need an NOL deduction to offset any potential tax consequences.===>>yes they ‘d allow c/f; Your client may carry back however, as no election was made in 2010, they need to carry forward. A reg C corp can normally carry a NOL back 2years and forward 20 years. Unlike S corp/MMLLC, any NOL it suffers provides no tax benefit to the shareholders. Such a loss can only be used by the corp itself at the corp level.As net operating losses are anticipated by a corporation, for the state, the NOL carryback computation will depend upon the business’ structure. Since states law generally incorporate federal law, the federal regulations will still apply to the extent they do not conflict with state’s modifications. However, you need to check it with the dept of rev of your state for more accurate info on the issue.
Here are my questions...
Will carryforward to 2014 be disallowed by the IRS even though there was no taxable income in any of the prior, "carryback" years? =======>>>>> Yes it’d be allowed NOT disallowed; The carryback period for an NOL generally is 2 years. Any loss not applied in the preceding years can be carried forward up to 20 years. since the NOLs were not used in the prior 2 years,2008 / 2009, the remaining NOLs can be carried forward for up to 20 years from 2014 with operating income, after the tax years in which the NOLs were generated.As the corp has NOLs, it generally can elect to waive the entire carryback period for the NOLs and instead carry the NOLs forward to future tax years. Certain corps can make the election for the loss year by checking the box on Form 1120, Sch K, line 11/ the comparable line of the corporation's income tax return, and filing the corp's return by its due date, including extensions. If the corp timely filed its return for the loss year without making the election, it can make the election on an amended return filed within 6 months of the due date of the loss year return excluding extensions.
Would be wise to preemptively amend 2012 tax year (which is still within the statute of
limitation) just to "record" that there is no "benefit" of doing so ==========>>I guess it depends ; How Do you Know Which is Better? You know your profits in previous years of 2088/2009 or 2014, but you must estimate guesstimate, actually your profits in future years also. If taxes are raised in the future, you may be better off taking a tax loss later, rather than carryng them back to try to use them to offset profits in the past years. If you think the Corp has a lot of potential for growth, and profit, over the next 20 years, you might decide to forgo the carryback possibilities and go with the carry forward. You need to run various scenarios before making a decision.
and then carry it forward to each subsequent year (2013 and then finally 2014) just to play it safe?========>>As mentioned above.