NOL Carryback

[cpabsd]

Taxpayer had an NOL for tax year 2006. Carryback was completed within appropriate time limits. The carryback to 2004 produced no tax benefit. All carryover then utilized for 2005. The IRS is notifying taxpayer that the numbers were incorrect. I can not find information specifically detailing how to complete the Schedule B of Form 1045. Seems like my client is losing here. Below are actual numbers. Which is correct?

2004 AGI - 14,759. Standard deduction - 9700 Personal exemptions - 6200 Taxable income -1141

These are the numbers on the original 2004 tax return. Obviosly there is no tax benefit from carrying anything back to that year. However, the IRS is calculating that the taxpayer is using $5059 of the NOL carryback for that year. That essentially means that the taxpayer is not receiving benefit of personal exemptions for that tax year. Is this correct? It makes a difference on the dollar amount available to be carried back to 2005. My client paid no income tax in 2004 why should part of the NOL be eaten up by that year?

Thanks for any help.

[Maribeth]

That is correct. The NOL used in a carryback year is determined by modified taxable income which does not include the deduction for exemptions. Your modified taxable income is 5,059; NOL carryback used 5,059. It probably would have been more advantageous to the client to make the election to carryforward the 2006 NOL.

Maribeth

[OldJack]

The IRS concept is correct inthat a NOL is deducted on page 1 thereby reducing AGI before any deductions or exemptions on page 2. I usually check the carryback results and the estimated carryforward results before filing the 1040 with a NOL.