Carryback of operating losses

[sandnsea]

Can somebody explain to me how a 5 year carryback exactly functions as to cash and credit and daily operations, and how it helps a business this year. Thanks.

[Stardust]

1. If you paid taxes on profits during the previous 5 years, you get the money back.

(I think):think:

[sandnsea]

2. Well that sucks

I have to disagree with that one, I'll ask FrenchieCat about it, she's a CPA.

[whistle]

3. Of course, this loophole has never been allowed for individual taxpayers

...who loose their jobs

[1]

4. not true...

prior to the tax reform act of 1986 an individual could use the "income averaging" method of filing taxes across a five year period.

hell, you could even deduct credit card interest.

boo, the tax reform act of 1986...

[whistle]

5. Right, I forgot about that, but there were major restrictions on its use

...mainly for the benefit of movie and sports stars who hit it big as I recall

[1]

7. no, it worked for anyone. particularly for someone who lost their job...

for most people, averaging had no (or a negative) effect on their tax burden because for most income was fairly consistent. it took big swings in income to get any advantage from averaging.

i had a very well paying job for a number of years that went to zero when they shut down my location. i decided to get a degree and used the averaging tax refunds in the years of school to help pay for that education. after graduation my income took a big upturn and i continued to average and used those refunds to pay off my student loans.

perhaps they should bring back averaging (on some restricted basis excluding movie and sports stars) to assist people currently suffering from job loss...

[whistle]

10. 39 years of working I've never missed a pay check, most fortunate

...never needed to use income averaging

[FrenchieCat]

6. A 5 year carryback on an operating loss means ....

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.

[sandnsea]

8. Oh I see

I've actually never understood how small businesses can operate at a loss unless they have huge credit expenses. I'm broke all the time, but I still never operate in the red, not on a cash basis anyway. I suppose it's different if you use the accrual method, right?

[FrenchieCat]

9. A small business can operate via borrowed money, e.g., a credit line or a

direct loan from the taxpayer or by taking equity out of the company. In otherwords, they are operating at a loss, but still have cash available to them to make up the shortfall.

[Igel]

11. Many businesses assume that they'll operate at a loss for a while.

The business plan for the one I worked for outlined the steps the owner anticipated would lead to profitability--sales goals for each year, anticipated outlays, the point at which it would have to move from her home to an independent location, etc., etc.

IIRC, she used the accrual method of accounting--she didn't see a point in depreciating over a decade if she thought the business might fail after 4 years. Not the world according to GAPP, I don't think, in how she dealt with how assets or return on investment.