Tax practitioners can speed up the processing of net operating losses by avoiding some common errors.
Individuals, estates and trusts may have an NOL if deductions exceed income for the year. Taxpayers can use an NOL by deducting it from income in another year or years.
If you carry back your NOL, you can use Form 1045, Application for Tentative Refund, or Form 1040X Amended U. S. Individual Income Tax Return. Form 1045 is an application for a quick refund, resulting from a tentative adjustment of tax in a carryback year.
Generally, Form 1045 must be filed after the NOL year tax return was filed, but not later than one year after the NOL year. Any claims filed more than one year after the end of the NOL year must be filed on Form 1040X, or an amended Form 1041, U.S. Income Tax Return for Estates and Trusts.
Here are some common errors that resulted in an NOL rejection.
Failure to Provide Documentation to Support the NOL Calculation
Solution: Review the checklist of “What to Attach” in the Form 1045 instructions. Be sure to include all forms or schedules for items refigured in the carryback year. Also, provide a copy of any examination reports if the IRS has previously audited the return.
Failure to Separate All Items on the Return and Tax Account When an Allocation Is Required Because of a Change in Filing or Marital Status
Solution: Attach a complete breakdown of each spouse’s income; a detailed capital gain calculation; deductions, including a list of total Schedule A Itemized Deductions; exemptions; taxable income; credits; other taxes, including separate Forms 6251, Alternative Minimum Tax; federal tax withheld; payments; offsets; and refunds.
For information about figuring the NOL carrybacks and carryovers for married people whose filing status changes for any tax year involved in figuring an NOL carryback or carryover, see Publication 536, Net Operating Losses for Individuals, Estates, and Trusts.
Incorrect “Before Carryback” Figures On Form 1045 or Form 1040X
Solution: Before carryback figures are the amounts from the original filed return. If there have been any adjustments made to the original tax return amounts, either by the taxpayer or IRS, use personal records or order an IRS transcript of the tax account to identify the before carryback figures.
To order a transcript, call (800) 829-1040 for Form 1040, or (800) 829-4933 for business returns, or file Form 4506-T, Request for Transcript of Tax Return, at www.irs.gov/pub/irs-pdf/f4506t.pdf.
Missing NOL and Alternative Tax NOL Calculations
Solution: For NOL calculations, attach Form 1045, Schedule A NOL. For ATNOL calculations, attach the calculation and a Form 6251, AMT. If the taxpayer did not file a Form 6251, with the loss year and/or carryover years’ returns, the IRS must have a copy of completed Forms 6251 to determine the total adjustments and preferences for the ATNOL deductions.
Incorrect NOL and ATNOL Calculations
Solution: The NOL calculation on Form 1045, Schedule A and ATNOL calculations must include all non-business and business capital gains and losses equal to the net capital gains or losses from Form 1040, Schedule D Capital Gains and Losses.
Recalculating Charitable Contributions Based On an NOL Carryback
Solution: The charitable contributions on Form 1040 Schedule A are not changed by an NOL carryback. Only carryforward losses (where the loss year occurred before the carryover year) will affect the adjusted gross income for computing the percentages for allowable contributions.
Election to Waive Carryback Period Filed Late
Solution: To make the election to carry an NOL and ATNOL forward without first carrying it back, the election must have been made with the original loss year return, or filed with a Form 1040X within six months of the original due date (excluding extensions) of the loss year return.
If the election was not timely made, the NOL must be carried back before being carried forward. Remember to attach a copy of the timely election to the return where the NOL is carried forward.
Failure to Provide A Breakdown Of How Each NOL Changed The Tax Figures When Combining Multiple Years’ NOL Carrybacks On The Same Form 1040X
Solution: If you are carrying over more than one NOL, apply each one separately, starting with the earliest one, to determine your NOL deduction. Attach a copy of each separate computation to your 1040X.
Combining Changes To Other Income/Deductions On A Prior Year Return That Are Not Related To An NOL Carryback Adjustment
Solution: NOLs have different processing dates and statutory requirements than regular tax changes. Therefore, non-NOL adjustments must be made on a separate amended return.
For more information on NOLs, see Publication 536, Form 1045 and instructions.
These tips are courtesy of the IRS. For more information, visit www.irs.gov/businesses/small/article/0,,id=128495,00.html.
©2004 California Society of Certified Public Accountants. For reprint permission, contact Aldo Maragoni, managing editor.