Although the tax code contains some exceptions, income is generally taxable in the tax year received and expenses are claimed as deductions in the year paid. But “carryforwards” and “carrybacks” have special rules. In this case, certain losses and deductions can be carried forward to offset income in future years or carried back to offset income in prior years, providing tax benefits.
Here are four examples:
Capital losses. After you net annual capital gains and capital losses, you can use any excess loss to offset up to $3,000 of ordinary income. Remaining losses can be carried over to offset gains in future years. The carryforward continues until the excess loss is exhausted.
For example, suppose you have a net capital loss of $10,000 for 2015. After using $3,000 to offset ordinary income on your 2015 return, you carry the remaining $7,000 to 2016. The excess loss is first applied to your 2016 capital gains, and then to as much as $3,000 of your ordinary income. Any remaining loss is carried forward to 2017 and future years.
Charitable deductions. Your annual charitable deductions are limited by a “ceiling” or maximum amount, as measured by a percentage. For example, the general rule is that your itemized deduction for most charitable donations for a year can’t exceed 50% of your adjusted gross income (AGI). Gifts of appreciated property are limited to 30% of your AGI (20% in some cases) in the tax year in which the donations are made. When you contribute more than these limits in a year, you can deduct the excess on future tax returns. The carryover period for charitable deductions is five years.
Home office deduction. If you qualify for a home office deduction and you calculate your deduction using the regular method, your benefit for the current year can’t exceed the gross income from your business minus business expenses (other than home office expenses). Any excess is carried forward to the next year. Caution: No carryforward is available when you choose the “simplified” method to compute your home office deduction.
Net operating losses (NOLs). Business NOLs can be carried back two years and forward 20 years. Here’s how it works. Say you calculate a $50,000 NOL in 2015. Under the general rule, you’ll use the loss first to offset taxable income in 2013 and 2014. Then you’ll carry the remainder forward, potentially until 2035. Tip: As an alternative, you may opt to forego the carryback and instead carry the entire NOL forward.
Give us a call for help in maximizing the tax benefits of carryforwards or carrybacks.
*This newsletter is issued quarterly to provide you with an informative summary of current business, financial, and tax planning news and opportunities. Do not apply this general information to your specific situation without additional details and/or professional assistance.