By Kenneth H. Bridges, CPA, PFS July 2015
For income tax purposes, a net operating loss can be carried back 2 years or forward up to 20 years. While less than perfect, this provision tends to mostly smooth out the otherwise potential tax inequities of having losses in some years and profit in others. However, as the Tax Court pointed out in a recent case (Stebbins), there is no carryback or carryforward of losses in computing self-employment tax. For example, if you start a business (of a type subject to self-employment tax) in 2015 and incur a $100,000 loss and then enjoy a $100,000 profit in 2016, cumulatively you will have just broken even, but you will owe self-employment tax on $100,000 of profit. Accordingly, with a business potentially subject to self-employment tax it is important to carefully consider the timing of your income and loss.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.