80% NOL Application

[Corduroy Frog]

A Farmer has had consistent losses for several years, and has been borrowing big time money to cover the losses.  He knows he will sell the property in 2023 at a whopping gain, and so do the lenders.  He sells on installment sale to reduce taxes.

Let me be sure I have this correct.

Hypothetical Facts:  2023 taxable income $120,000.  NOL from 2017 is $40,000  NOL from 2018-2022 is $90,000.

1. NOL from 2017 is applied first, reducing taxable income to $80,000.
2. Only 80% of $80,000 is available for the application of post 2017 losses, or $64,000.
3. Taxable income is $16,000 after applying $64,000 of available NOL.
4. NOL carryforward to 2024 is $26,000.

Thank you in advance for taking time to respond.

[Lee B]

Reminder:   The IRS considers NOL and Capital Gains to be two different classes of Income, which cannot be used to offset each other.

[Corduroy Frog]

Thank you so much.  In other words, the NOL can only be used to offset "operating" income.  So in my example, if the taxable income is due to Capital Gains, there would be no offset.  Some of the income will be depreciation recapture on farm equipment (4797) which is "ordinary" income, but perhaps not "operating" income.  Thank you.

[DANRVAN]

2 hours ago, Lee B said:

Reminder:   The IRS considers NOL and Capital Gains to be two different classes of Income, which cannot be used to offset each other.

Maybe some confusion in how I am reading your statement; but I think you are referring to the year of loss and carryforward computation.

In the year of deduction the limitation is taxable income (with 80% rule)  without regards to section 199A.

[DANRVAN]

6 minutes ago, Corduroy Frog said:

So in my example, if the taxable income is due to Capital Gains, there would be no offset.

Incorrect.

Suggest you review sect 172(a).

 

 

[Corduroy Frog]

Thank you DANRVAN.  I have indeed printed out 15 pages of 172(a) and will read it.  The various cross-references to other codes and cites are why persons such as myself use this forum to receive quicker and clearer answers on a number of situation.  Thanks again.

[DANRVAN]

11 hours ago, Corduroy Frog said:

I have indeed printed out 15 pages of 172(a) and will read it.

You are making it way to complicated.  You don't need to read past paragraph (a) titled "Deduction Allowed".