One of the most often forgotten about benefits new business founders overlook is the ability to carry forward and carry back a net operating loss. Founders of new business struggle to find sources of cash flow available to bootstrap their way to sustainable profits. A new entrepreneur founding a business should consider the benefits of cash flow from the net operating loss.
A company has a net operating loss when its business expenses exceed it business income. Business expenses excludes any capital losses, personal exemptions, and 50% of the gain from the sale or exchange of a qualified business stock. Business expenses also exclude alimony paid, contributions to an individual retirement account or self-employed retirement plan, payments to a health savings account, and most itemized deductions with some exceptions.
A founder can carry back a loss two years before the year in which the company incurred the loss creating a refund of previously paid taxes. A company can carry forward any remaining losses for up to 20 years reducing future tax liabilities. When a new business struggles to make ends meet it should not lose sight of this important tax benefit.
Most new businesses take 3 to 5 years to achieve profitability, but meanwhile the company can preserve cash. Using the net operating loss deduction can produce cash from the refund of taxes paid previously. This refund produces cash a business owner can use in the business.
Have you built the net operating loss into your cash budget? If you want to take advantage of the net operating loss, but have not already done so I encourage you to get help now. Contact us.