Low commodity prices may cause some farm operations to incur net operating losses in 2016. When farm expenses exceed farm income, and the resulting net loss exceeds all other types of income such as wages, interest, dividends, capital gains, rent, etc., a net operating loss (NOL) likely exists. In this case, a special computation must be done to compute the NOL, which can be carried back to obtain refunds of taxes paid in prior years and/or carried forward to reduce taxable income in future years.
NOL's incurred by non-farm businesses can be carried back for two years to obtain refunds of taxes paid, and forward for 20 years until fully absorbed. However, a farm net operating loss can be carried back five years to obtain refunds of taxes paid and forward 20 years until fully absorbed. Again, a special computation must be made to determine how much of the net operating loss is absorbed each year and what amount is available to use in the next succeeding year.
A taxpayer with a farm NOL may irrevocably elect to forego the five year carryback period and do a two year carryback, or can elect to forego the entire carryback period and only carry the loss forward. If there was little to no income tax paid in the past five years, it makes sense to forego the carryback period. The NOL elections are very important and must be made on a timely filed return or an amended return filed by the extended due date of the original return, which is Oct. 15 for a calendar year return. If the election to forego the carryback period is not made, the NOL must be carried back within three years of the NOL year, or the taxpayer could lose the NOL.
There are also special NOL carryback and carry forward rules for NOL's incurred in a federally declared disaster area. A three year carryback period is available for NOL's incurred in such an area. Therefore, a farm with a NOL incurred in a federally declared disaster area, is eligible for a five, three or two year carryback. The carryforward period remains 20 years. Of course, once an NOL is fully absorbed in either a carryback or carryforward year, it cannot be used in another year.
Except for C corporations, the NOL is computed on the individual's 1040 income tax return. Pass-through entities such as partnerships, LLC's taxed as a partnership, and S corporations do not compute the NOL. These entities simply pass-through the income and expenses to the owner's return where the NOL is computed. C corporations, which are a separate taxable entity, compute their own NOL's.
When a farm NOL is incurred, it is very important to analyze the tax situation in the prior five years. The tax benefit of a NOL depends on each year's marginal income tax bracket. The higher the marginal tax bracket, the more valuable the NOL becomes. NOL carrybacks and carryforwards can only be used to reduce federal and state income taxes. NOL's do not affect self-employment tax (social security for self-employed individuals). The carryback of a NOL requires the carryback year's tax returns to be recomputed. A separate filing is required for both the federal carryback and state carryback. NOL carrybacks can be very complex, but can also generate substantial tax refunds from prior years.
GreenStone’s tax accountants handled a significant number of NOL's over the years, and are very familiar with NOL's since the highly volatile commodity markets cause farms to incur NOL's more frequently than non-farm businesses. If your farm incurs a NOL, make sure your tax preparer understands how to properly analyze the carryback years and is familiar with the important elections that are available. GreenStone’s experienced tax accountants will make sure you get the largest tax benefit available to you!
Kelly Tobin is the Senior Tax Accountant & Product Manager for GreenStone.
NOL's incurred by non-farm businesses can be carried back for two years to obtain refunds of taxes paid, and forward for 20 years until fully absorbed. However, a farm net operating loss can be carried back five years to obtain refunds of taxes paid and forward 20 years until fully absorbed. Again, a special computation must be made to determine how much of the net operating loss is absorbed each year and what amount is available to use in the next succeeding year.
A taxpayer with a farm NOL may irrevocably elect to forego the five year carryback period and do a two year carryback, or can elect to forego the entire carryback period and only carry the loss forward. If there was little to no income tax paid in the past five years, it makes sense to forego the carryback period. The NOL elections are very important and must be made on a timely filed return or an amended return filed by the extended due date of the original return, which is Oct. 15 for a calendar year return. If the election to forego the carryback period is not made, the NOL must be carried back within three years of the NOL year, or the taxpayer could lose the NOL.
There are also special NOL carryback and carry forward rules for NOL's incurred in a federally declared disaster area. A three year carryback period is available for NOL's incurred in such an area. Therefore, a farm with a NOL incurred in a federally declared disaster area, is eligible for a five, three or two year carryback. The carryforward period remains 20 years. Of course, once an NOL is fully absorbed in either a carryback or carryforward year, it cannot be used in another year.
Except for C corporations, the NOL is computed on the individual's 1040 income tax return. Pass-through entities such as partnerships, LLC's taxed as a partnership, and S corporations do not compute the NOL. These entities simply pass-through the income and expenses to the owner's return where the NOL is computed. C corporations, which are a separate taxable entity, compute their own NOL's.
When a farm NOL is incurred, it is very important to analyze the tax situation in the prior five years. The tax benefit of a NOL depends on each year's marginal income tax bracket. The higher the marginal tax bracket, the more valuable the NOL becomes. NOL carrybacks and carryforwards can only be used to reduce federal and state income taxes. NOL's do not affect self-employment tax (social security for self-employed individuals). The carryback of a NOL requires the carryback year's tax returns to be recomputed. A separate filing is required for both the federal carryback and state carryback. NOL carrybacks can be very complex, but can also generate substantial tax refunds from prior years.
GreenStone’s tax accountants handled a significant number of NOL's over the years, and are very familiar with NOL's since the highly volatile commodity markets cause farms to incur NOL's more frequently than non-farm businesses. If your farm incurs a NOL, make sure your tax preparer understands how to properly analyze the carryback years and is familiar with the important elections that are available. GreenStone’s experienced tax accountants will make sure you get the largest tax benefit available to you!
Kelly Tobin is the Senior Tax Accountant & Product Manager for GreenStone.
