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NET OPERATING LOSS (NOL): A Good Way to Get Extra Funds for Your Stock Photo Business
Osceola, WI
Tuesday, April 05, 2005
If your stock photo business suffers a loss this year, you will owe no income taxes on your stock photo business. You may not know that this loss will also offset your other income, such as a salary from an outside job, or your spouse's wages, and reduce your income tax for this year.
You can also use this year's stock photography business loss to offset income and reduce taxes from other years. You are allowed to carry back what the IRS calls a Net Operating Loss (NOL), to apply against prior income, and receive a refund of prior years' taxes, even if you were not in the stock business back then. The loss can be carried back two years. And if your taxable income for the two prior years is not sufficient to absorb the entire loss, you may carry the balance forward, to apply to as many as 20 future years. At your option, you can forego the two-year carry-back period and apply your NOL entirely to the 20 future years.
An NOL, like any other tax deduction, is worth more in a high income year. If the two preceding years generated little or no income tax, you probably will do better to forego the carry-back, and apply the entire NOL to future years. Also, that way you avoid filing an amended return, which starts the IRS audit statute of limitations running again. Be sure to discuss these options with your tax advisor.
Net Operating Loss is not simply the business loss shown on your tax return. It is a complicated combination of business and non-business income and deductions. The NOL calculations are quite complex, and there's no way to simplify the procedure. Step-by-step instructions are explained in IRS Publication #536, "Net Operating Losses" Don't be put off by their complexity; the NOL deduction may save you a bundle in income taxes and help you with funds to pay for new equipment and other business expenses.
For carrybacks, use Form 1045, "Application for Tentative Refund" For carryforward, individuals use "Other income" line on Form 1040; corporations use "Net operating loss deduction" line on Form 1120.
Source: "422 Tax Deductions For Self-employed Individuals," by Bernard B. Kamoroff, C.P.A. (New 5th Ed. $17.95 plus $3.85 p&b) Bell Springs Publishing, Box 1240, Willits, CA 95490 (216 pages; ISBN o-917510-23-2) 1 800 515-8050; Fax: 1 707 459-8614.
You can also use this year's stock photography business loss to offset income and reduce taxes from other years. You are allowed to carry back what the IRS calls a Net Operating Loss (NOL), to apply against prior income, and receive a refund of prior years' taxes, even if you were not in the stock business back then. The loss can be carried back two years. And if your taxable income for the two prior years is not sufficient to absorb the entire loss, you may carry the balance forward, to apply to as many as 20 future years. At your option, you can forego the two-year carry-back period and apply your NOL entirely to the 20 future years.
An NOL, like any other tax deduction, is worth more in a high income year. If the two preceding years generated little or no income tax, you probably will do better to forego the carry-back, and apply the entire NOL to future years. Also, that way you avoid filing an amended return, which starts the IRS audit statute of limitations running again. Be sure to discuss these options with your tax advisor.
Net Operating Loss is not simply the business loss shown on your tax return. It is a complicated combination of business and non-business income and deductions. The NOL calculations are quite complex, and there's no way to simplify the procedure. Step-by-step instructions are explained in IRS Publication #536, "Net Operating Losses" Don't be put off by their complexity; the NOL deduction may save you a bundle in income taxes and help you with funds to pay for new equipment and other business expenses.
For carrybacks, use Form 1045, "Application for Tentative Refund" For carryforward, individuals use "Other income" line on Form 1040; corporations use "Net operating loss deduction" line on Form 1120.
Source: "422 Tax Deductions For Self-employed Individuals," by Bernard B. Kamoroff, C.P.A. (New 5th Ed. $17.95 plus $3.85 p&b) Bell Springs Publishing, Box 1240, Willits, CA 95490 (216 pages; ISBN o-917510-23-2) 1 800 515-8050; Fax: 1 707 459-8614.
Rohn Engh
Director
PhotoSource International
Osceola, WI
800-624-0266
715 248 7394
