[SoCalCPA]

What I understand about NOL: “From year 2010 forward, corporations are entitled to the same NOL rules as individuals. THe carryback is 2 years, and the carryforward is 20 years. A Form 1120X must be filed within three years of the due date of the return for the loss year.

So in the following question, why are S corps. are not allowed of NOL deduction, even though the statement above states that corps are entitled?

Q) Which of the following types of entities are entitled to the NOL deduction?

A) Trusts and Estates (NOT S Crops, NOT partnerships)

The answer states that S Corps are pass-through entities, thus they do not pay tax at the entity level. Therefore, NOLs are not allowed at the S corp level. Thanks for your help!

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[Minimorty]

@SoCalCPA – The quote you started your post with basically deals with C corporations, not S corporations. The reason stated in the answer (s corps do not pay federal entity level income taxes) is the reason. S corps, LLCs, LPs, etc. are all pass-through entities that do not pay tax at the entity level. There is no reason to offer a Net Operating Loss to a company that does not pay any income taxes on its taxable income. However, the individual shareholder can take the losses of the S corp into consideration when calculating his/her individual NOL.

Here is a little info on NOLs and how it relates to the individual, trust, and estate side of things.

https://www.irs.gov/pub/irs-pdf/p536.pdf

[round1]

Didn't get this one: “From year 2010 forward, corporations are entitled to the same NOL rules as individuals. THe carryback is 2 years, and the carryforward is 20 years.”

As individuals?!…. For individuals the cap. loss can be carried forward forever (INDEFINITELY); $3K may be deducted against ordinary income. The sole proprietorship can use the same 2b/20f rule (but it didn't change in 2010). Mind, though, the “investment at risk” limitation in this case.

As stated before, all these corp.S, LLP, etc. are “pass-trough” or “flow-through” entities. Each parther will receive the K-1 with a breakdown for different types of income, which will “flow-trough” to Schedule E (aka 1040 individual tax return). See also the “investment at risk” limitation. It means a partner cannot deduct a loss larger that this basis in the partnership for the current year. But, let's say, the next year, when his adjusted basis will get bigger that 0, he'll be able to carryforward the previously disallowed loss deduction.So, the rule is not 20 yrs, but an INDEFINITE amount of years (depending on his existing basis in LLP).

Another minefield: passive income loss – usually deductible against passive income (from other activities), but not against ordinary income.

DONE!

[Minimorty]

@round1 – I believe you are referring to the rules for capital losses, whereas the initial question pertains to operating losses.

[round1]

Yes, I said so that $3K – is for capital loss (“cap. loss” in my text).

Everything else is about NOLs! Where does an individual report a NOL on its 1040? The NOLs are not deductible at the entity level (as you said), so for an individual to have a NOL reportable on its tax return it has to be either a sole proprietorship or Corp.S, LLP, LLC (the NOL can be carried indefinitely though!). That's the main difference from regular corp.C, when the “loss deductibility period” is limited to 20 yrs (and loss is taken against corporate income, not individual one).

I was trying to explain to the OP where he can FIND the NOL as a deductible item on a tax return. He can find it only on Sch. E (1040 individual).

DONE!

[Minimorty]

@round1 – The link I posted above walks you through the NOL and how and where to report it.

[round1]

“@round1 – The link I posted above walks you through the NOL and how and where to report it. “

It still misses the point about Corp.S, LLP (aka K-1 reporting on NOLs).

link: https://www.irs.gov/instructions/i1065sk1/ch01.html

“Limitations on Losses, Deductions, and Credits

There are potential limitations on partnership losses that you can deduct on your return. These limitations and the order in which you must apply them are as follows: the basis rules, the at-risk limitations, and the passive activity limitations. These limitations are discussed below.

Basis Rules

Generally, you may not claim your share of a partnership loss (including a capital loss) to the extent that it is greater than the adjusted basis of your partnership interest at the end of the partnership's tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year. “

HINT: “…can be carried forward indefinitely…”. That's the difference, even if Publication 536 says something about 5/3/2 carryback and 20 carryforward for individual NOLs, it mainly refers to Sch. C type NOLs.

DONE!

[Minimorty]

@round1 – I still think you are confused. For individuals, you are allowed to carry forward a CAPITAL loss indefinitely, but you are only allowed to carry forward a NOL for 20 years.

[Author]

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