Did Your Business Have a Net Operating Loss in 2014?

If you reported more business expenses than income on your 2014 tax return, you may have a net operating loss. That means you have the opportunity to apply your loss to past and future tax years to generate a refund or reduce your tax liability.

Unless you elected to carry the entire loss to future years, the general rule is you can use it to offset income in the two prior years, then carry the remainder, if any, forward for the next 20 years. Here’s how it works. Your 2014 operating loss will first reduce the income you reported on your 2012 and 2013 federal income tax returns, potentially generating refunds for those years. Any remaining 2014 operating loss can be used to offset income on future tax returns, beginning with the one you’ll file next April for 2015.

You claim the carryback on “Form 1045, Application for Tentative Refund,” or “Form 1040X, Amended U.S. Individual Income Tax Return.” Using Form 1045 will result in a faster refund, but you must file the return within a year of the “loss year” — that is, by December 2015 for an operating loss reported on your calendar year 2014 tax return. If you choose to file Form 1040X, you have up to three years from the due date of your 2014 return to amend prior-year forms. Either way, the IRS will pay interest after 45 days if the return is not processed in that time.

You’ll report any operating loss remaining after the carryback on Form 1040 in future years as a negative number on the line for “other income.” You will need to attach a statement showing how you calculated the amount.

Give us a call to discuss other rules and tax planning moves for net operating losses. We’re here to help.