another NOL question

[joanmcq]

I'm having a problem figuring out the NOL carryforward from a 2010 DIY return to 2011 which I am preparing. Please understand that I've had very few clients with NOLs, and those have only been for clients for which I've prepared all years.

NOL on line 21 for 2010 is ($464,927), and when I use this figure to prepare the worksheet for the carryover (I proforma'd 2010 just to try to work this out), the worksheet is showing zero NOL for 2011. Very little of this would have been used up in 2010-there was some 3rd party sick pay of $80,000 another loss from rentals and an S-corp of $60,000, and social security of $22,000, none of which was taxable. A little bit of interest income and itemized deductions of $41,000. The 2010 NOL was c/f from earlier years. I have the S-corp returns which do detail large losses in a few previous years, but don't have the 1040s. Some of the rentals generate income, some losses.

When I do the worksheet, I get a negative $478,479 on line 1, which is totally offset by line 24, NOL deduction for losses in other years. My gut tells me this is not correct; he should have quite the loss c/f for 2011, and I am not putting the correct numbers on the worksheet. Should he have only put the amount of NOL on line 21 that he was actually using up for 2010? I get this idea from reading Pub 536. I know for a fact that TT does not support NOL calculations, so although this guy has a decent knowledge of his biz accounting and recordkeeping is good, anything TT did not do automatically is suspect.

I also have an issue with the CA NOL; no forms 3805 were filed to calculate the CA NOL, and as a qualified small business, I know some of these have been freed up in this year at least.

[Koss]

NOL Carryforward

Was the NOL of 464,927 carried forward into 2010 from a previous year? If so, what year?

To make sure you're getting it right, you really need to have a copy of the return from the year the NOL occurred, and a copy of each year after that, so that you can trace the entire history.

Should he have only put the amount of NOL on line 21 that he was actually using up for 2010?

Yes. An NOL deduction that is carried forward from a previous year is entered on line 21 of Form 1040, but only to the extent that it can be used. So that is probably why your worksheet is not producing the correct results.

BMK

[joanmcq]

Now for CA....

Thanks Koss.

I did just get the prior year's 1040s, so I can compute them correctly. Thank you! I thought I was going batty looking at this thing.

Now I just have to do the same for CA; not a good thing since TT didn't produce the proper forms to track an NOL. I'm not sure if I have to amend to include it or not.

I understand that an incorrect federal NOL can just be adjusted in the current year, and not require amendment?

[Possi]

Thanks Koss.

I understand that an incorrect federal NOL can just be adjusted in the current year, and not require amendment?

I sure hope so, because I did the same thing. I put the entire NOL on line 21 that was being carried from 2009 into 2010 and I didn't actually use any of it.

So, back to the quoted question... No amendment?

Thanks, Koss...

[Koss]

Incorrect NOL

I haven't run into this before.

I can see the rationale for not filing an amended return. If the NOL cannot be greater than a certain amount, and it was overstated on line 21, then it's obviously a typo. And filing an amended return will not change the bottom line of that year's return.

But in theory it might be necessary to file an amended return in order to properly track the amount that remains each year.

When you claim an NOL carryforward on line 21, you have to attach a fairly detailed statement explaining how it was calculated. So if you explain in detail on the current year return that the NOL was incorrect on the prior year return, that explains how much is available to carried forward into the current year and beyond. So I suppose that would eliminate the need for an amended return.

BMK

[appelman]

I disagree strongly with earlier posters!

Line 21 should show the entire amount of carryforward from prior years, with a statement explaining the details of where it came from. Any carryover to future years will be calculated by means of the worksheet on p. 16 of Pub. 536. You should use a separate worksheet for each NOL year with which you are dealing.

[rjholmes]

I agree with Appleman.

The nol carryover worksheet bottom line says to enter the result of the full carryover to the other income line of the following year's form 1040.

[joanmcq]

However, in doing that, the calculation will wipe out any carryover.

Try it and see. This guy has a 400K+ c/f from 2010, 80k income on line 7 and another 60k loss on line 17. I've got the prior year's returns, and although the exact number of the c/f may not be correct, there is indeed a huge one, more than enough to have a c/f to 2011.

I'm going to proforma the rest of the years to get an accurate figures (working the NOL worksheet by hand is one of those head-spinners, but I did do it to try to come up with the 2011 c/f, just in case it was a software issue. But it wasn't. Pub 536 shows using the 1045 to work out the carryforward or carryback. Don't know if I'll come up with a different answer.

[appelman]

That's the way it goes!

You are not allowed to elect how much of your NOL carryover is applied, any more than you are allowed to elect how much of a capital loss carryover is applied. In both cases, there are circumstances under which the carryovers will be used up with little or no tax benefit.

[joanmcq]

Then in every case, no matter what the income, there would be no carryforward. the mechanics of the form don't allow it.

[appelman]

Not true.

Look at the worksheet in Pub. 536.

[okie1tax]

NOL carryforward

Joan, are you sure you are inputting the positive and negative numbers correctly? That was my biggest problem with the worksheet.

[rjholmes]

From your post (you mentioned line 24), it appears you are filling out schedule a of form 1045. That form is done after your 1040 is complete to see if you have a loss for the current year. When you put the carryover amount on line 24, if the bottom line results in a loss, then you do indeed have a current loss that can be carried back or forward. That form does not cancel out the amount you carry forward from previous years. The table 1 worksheet in pub 536 is used to figure how much is carried over into the following year. You should have a worksheet for each year that a loss actually occurred. The earlier years are used up first as there is a time limit of 20 years.

Without know the actual figures on the return it is difficult to know exactly why the full nol amount is not being shown. But from the figures you gave it appears that there is a loss in the current year without the nol. Is that correct?

[Golden Rocket]

Details

I think we all know Joan's expertise and that the problems are most likely not of her own misunderstanding.

The devil is in the details, and possibly in the software. If it is working properly, she should enter the ENTIRE carryforward from 2010, and the software should calculate how much is absorbed into 2011 and how much remains to be taken in future years.

She also has little or no history. From the 2010 return (which she didn't prepare), the entire amount of the 2009 carryforward should show on line 21 whether absorbed in 2010 or not. That gives her the TOTAL loss for 2010 to be carried forward into 2011 regardless of whether the loss was incurred in 2009, 2008, 2007, 2006, etc. The only time the historical year should ever be relevant would be if some of it is coming from longer than 20 years ago and thus expires.

The software may also react to whether a carryforward was ELECTED or not. The default is a carryback, but the taxpayer may disclose an election to forego the carryback and roll forward. This possibility should be explored with her software company, especially since she did not prepare 2010 and such an election may have no record in her software.

[joanmcq]

I've subsequently gotten copies of the back returns from the time he started losing money from the corp (and rental properties). The oldest two, 2004 & 2005, were professionally prepared, and that's when the NOLs started. I still need to work through them all to figure out the correct numbers. I proforma'd the 2010 return because the software will fill out the c/f from the pub 536 worksheet-and it came out zero. In 2010 he had an NOL even without the carryforward, whereas in 2011 he would have a bit of income without it.

Since 2006, he started using TurboTax, and that software automatically puts in the election to waive the carryback. Since I used to work for that company that does audit rep for TT users, I'm really familiar with TT's limitations for NOLs. It doesn't support them at all, and for CA, doesn't even HAVE the 3805 to calculate the CA NOL.

I'm using ATX and although it has a copy of the Pub 536 worksheet to compute the NOL, I thought I could use the 1045 for a more complete calculation. But I haven't had time to work that one out either. I did find the checkbox to forego the carryback, but also found a worksheet that shows the history of the NOLs. I'm going to start at the beginning, proformaing the returns to get accurate numbers and try filling that out to see if it helps the calculations. That might be the error.

Oh, and thank you GR for the compliment on my level of expertise! I'm starting to feel like a dummy on this one. At least I AM being paid to correct all of this stuff-well maybe not for ALL my hours, but it'll be one of my biggest billings for this year due to this stuff.