GTT RESOURCES: NET
See our Updated Trader
Tax Center pages.
OLDER CONTENT: We cover this topic in Green's
2012 Trader Tax Guide
Update note: NOL's returned to 2 year carrybacks for 2010 NOLs, the 5
year choice was for 2008 and 2009 NOLs carrybacks only. Some states freeze
NOL carrybacks like CA and HI.
Net Operating Losses: a huge tax benefit for traders
Business taxpayers are allowed a special huge benefit Net Operating
Loss (NOL) tax laws. NOLs provide the opportunity to carry business losses
back or forward. You can make a fortune in one year and pay your taxes,
then lose a fortune in the following years, carry back your NOLs and get
huge refunds of taxes paid in the prior years. If it sounds too good to
be true well, it isnt! And, youre in for a lucky break
the NOL got even better.
The House and Senate Stimulus Bills in early 2009 both add a
five year NOL carry back period choice to the standard two year NOL carry
back period. This provision is expected to survive final negotiations
before passage and enactment. Congress and the White House did the same
thing in 2001.
- In 2001, Congress passed temporary relief extending the carry-back
period from two to five years for 2001 and 2002 NOLs. This is fantastic
news for traders, because most traders made a fortune in 1997, 1998
and 1999 and then lost a fortune in 2000, 2001 and 2002. For example,
a trader can carry back a 2001 NOL from 1996 through 2000, instead of
just carrying it back to 1999 and 2000 (which was the previous law).
This tax law change has great significance for traders, because many
already carried back 2000 losses to 1998 and 1999, and have already
used up the gains for those years. In summary, this tax law change will
put hundreds of thousands of dollars in the pockets of many traders.
Theres even more good news! For several years now and continued
under the current tax bills, AMT does not upset NOL benefits; there is
no preference or 90 percent rule anymore.
Our firm has many trader clients and we have prepared hundreds of net
operating loss tax returns over the years with great success. Our clients
have received their refunds. In some cases, the IRS asks some questions,
which are usually settled quickly. In a very few cases, the refunds are
delayed. NOL refund claim tax returns are very complex and require exact
execution. Otherwise, they can lead to questions from the IRS.
When it comes to NOL tax refund carry back returns on Form 1045
or Form 1040X, we strongly recommend that you engage our firm to prepare
these tax returns. If these returns are not filed in the absolute
best manner possible, they may draw attention from the IRS and that can
lead to problems with your refunds and a full fledged exam; which might
challenge your trader tax status and ordinary loss treatment (Section
475 MTM). For these types of returns, our values are the greatest; comparing
our very low fees to the results (tax-benefits) received. Click
here to learn more about our tax preparation services.
If your trader tax status is a "close call" and you
are worried about a large NOL carry back return drawing IRS scrutiny,
consider these two ideas.
- Carry forward the NOL: Timely elect to forgo the NOL carry
back and carry it forward (up to 20 years) instead. In the following
tax year, the NOL is deducted on your tax return and there is no indication
from where it came (no mention of trader tax status and MTM related
losses). Plus next year's regular Form 1040 is filed through regular
channels and it's not scrutinized by an NOL carryback processing group,
bent on protecting the Treasury.
- Absorb the NOL with a Roth IRA conversion: If you have an
NOL that means you can also do a Roth IRA conversion, since you are
under the modified AGI threshold. Absorb (or soak up) the NOL amount
by converting a regular IRA, Rollover IRA (or other retirement plan
account) into a Roth IRA. Most taxpayers need to finance this conversion
by paying taxes on the amount converted to the Roth, but for you it
may be tax-free, in that you may get to zero taxable income after absorbing
the NOL (negative taxable income). Or generate some taxable income to
take advantage of lower marginal tax brackets too.
These special strategies and much more on NOLs are included in Green's
2009 Trader Tax Guide available on our guide
See the article by Robert A. Green, CPA in the September 2002 issue of
Active Trader magazine (downloads are available on the Active Trader site).
It includes a sample 2001 tax return together with a Form 1045 NOL refund
tax return. That taxpayer example generated refund checks of close to
$600,000 on trading losses of $1.6 million in 2001. The article has analysis
and tips for filing NOL returns. Click
here for our Active Trader articles page. Green also wrote a groundbreaking
article on NOLs for traders in the March 2001 issue of Active Trader magazine.
To learn more about NOLs, visit www.irs.gov
and search "net operating losses."
If you have any questions, e-mail firstname.lastname@example.org
or call us.
Ready for a consultation
with a GTT CPA