If the business has a net operating loss, it can generally carry the loss back five years and forward for 20 years. Alternatively, it can elect to forgo the carry-back and simply carry the loss forward. Where a business was in a low tax bracket in prior years but is in a higher tax bracket now (and expects to remain in a high bracket in the future), it may be advisable to elect to forgo the carry-back. If the business simply does not have any prior income to offset by an net operating loss, do not make an election; simply carry the loss forward. By not making the election, you preserve the right to carry back the net operating loss if the IRS subsequently audits an earlier return and income results.

Specific Details

The taxpayer reduced their taxable income by $5,000 by electing to forgo a net operating loss carry-back. Since the taxpayers income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%).

Potential Savings

If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by electing to forgo a net operating loss carry-back.