Schedule F Net Operating Loss

[zigzywno]

My farm business's first year was 2020. In all it's three years—2020, 2021, and 2022—the farm incurred a net operating loss. My general understanding (please correct me if I'm wrong) is that farm NOLs in any given tax year must be used, if at all, as a carryback starting two years prior, but that the farm/taxpayer can elect to waive the carryback and have NOLs carryforward by attaching a statement declaring waiver of the carryback.

I read in a UT State Univ. publication called the Small Farm Tax Guide that "If a taxpayer does not elect out of the carryback, the NOL is treated as absorbed by the carryback years, to the extent there is income in those years to absorb it, whether or not the NOL deduction is claimed for those years."

So (correct me if I could possibly be wrong here), in none of the farm's years has it had income that could absorb a carryback. Also, because I had no understanding of NOL carryovers (I largely still don't, honestly), and because TurboTax seems to leave it entirely to the user to figure out and deal with, I have never made any carryback waiver. I also never put anything regarding my 2020 NOL into my 2021 taxes.

So my question is: Can I carryforward my NOLs from all three years? Or did I unknowingly screw something up (because of failure to waive or otherwise) such that one or more NOLS can no longer be carried forward?

Thanks!

EDIT: I'm less concerned about what to do with this year's NOL as I am about whether I can still do anything with my two previous NOLs, so I'll rephrase. #4 does have to do with this year's NOL. Simple 'yes' or 'no' answers will suffice for me here. Thanks!

1) My farm had a NOL in its first year in 2020. First year of operation, so no carryback waiver necessary; it can only carryforward, correct?

2) My farm also had a NOL in 2021. I don't believe I noted my 2020 NOL anywhere in my 2021 return. Did I need to do that somewhere in order to keep it available to carryforward when profitability is reached?

2a) If yes, can I amend the 2021 return to make the 2020 NOL available again?

3) I want keep my 2021 NOL available to carryforward, but I didn't attach a statement waiving carryback with that year's tax return. Was it necessary to do that even though there were no previous incomes that could absorb it?

4) My farm also had a NOL in 2022. I want to keep it available to carryforward when profitability is reached. Do I need to attach a statement waiving carryback  even though there are no previous incomes that could absorb it?

[Anonymous_]

See https://www.irs.gov/publications/p536#en_US_2022_publink1000177354

[AliciaP1 · Accepted solution]

The link posted by tagteam is helpful, but I will summarize it for you by answering your specific questions:

1. No, the 2020 farm NOL would have carried back to offset your taxable income reported in 2018 and 2019 to the extent the loss was large enough.  For example, if your 2018 AGI was $50,000 and your 2019 AGI was $50,000 and your 2020 farm loss was -$75,000, the loss is eliminated now because it offset all of 2018 income and half of 2019.  Since it has been more than 1 year after the due date of the carryback year, you will need to file Form 1040X for each carryback year to get your refund.
2. Again, since the carryback was not waived within 6 months of the due date of the return, you cannot carry this loss forward.  However, this loss would be applied to 2019 and 2020.  So, if my example above continues, there is only $25,000 AGI to be offset left from 2019.  If your 2021 loss was $50,000, it carries back and offsets the remaining AGI from 2019 and skips 2020 since there was no income (assuming you have no other source of income).  In this example, the remaining $25,000 loss in 2021 does carry forward and will be subject to the 80%-of-taxable-income limit.  You can include the application of the 2021 carryback to the Form 1040 X that would need to be filed due to the 2020 carryback.
   • The answer for 2a is N/A since the above answer is no
3. No, you needed to have filed the request for the waiver within 6 months after the original due date of filing the return.
4. Yes, you must include a waiver statement within 6 months after the original due date of filing the return.
   • Per the IRS to file the waiver:
     • To make this choice, attach a statement to your original return filed by the due date (including extensions) for the NOL year. This statement must show that you are choosing to waive the carryback period under section 172(b).  If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to your amended return, and write “Filed pursuant to section 301.9100-2” at the top of the statement. 

@zigzywno 

[zigzywno]

@AliciaP1, THANK YOU SO MUCH!! 😃 You're comment got me to finally get it into my head that the NOL is taken on the personal portion of the tax return even though it came from the business portion. Can I ask a couple follow-up questions?

1) All of my AGIs from 2018 onward were less than the taken standard deductions, so my taxable incomes in all those years were $0. Would NOL carrybacks still be absorbed by the AGIs in those years even though there was already no taxable income? Or would they automatically carryforward due to lack of taxable income?

2) I've since realized my 2020 NOL would actually carryback five years because of the CARES Act. So it would go back to 2015 when I did actually have taxable income. It's now 2023. Is it too late to file an amended return for 2015?

Thanks so much again!!!!!

[AliciaP1]

Yes, it is too late to file the amendment to carryback the loss to 2015, but you are required to consider it carried back since you did not file for the waiver timely.  You have 3 years from the due date of the carryback year to amend the return, and the CARES Act did not extend this.  The 5-year carryback rule was intended to be applied immediately or within 1 year of the NOL year and to be filed on Form 1045 which is due within that timeframe.

Your 2020 loss will be first applied to 2015, then 2016, 2017, 2018, and 2019 in order.  Your 2021 does not qualify for the CARES Act extended carryback, so it will get carried back to 2019 and 2020.  You should carryback your 2020 loss first and adjust AGI for those years, then apply 2021 losses and do the same.  If either year's losses are not exhausted through the carryback, you will apply them to 2022 and carry the whole loss forward to the extent it still exists.

You are correct in that if your AGI was $0 for a year, there's no income to offset, but AGI is calculated 1 line before the standard deduction so be sure you are looking at the correct line on each year's form.  As well as the fact that a Form 1040 has changed significantly in the last 5 years.  

[Edited 3/16/23 | 9:06 AM PDT]

@zigzywno 

[zigzywno]

@AliciaP1, thank you!! I believe the five-year carryback periods under the the CARES Act were limited to NOLs in years 2018, 2019, and 2020. Most businesses can only carryforward outside of those years, except farms, which get a two-year carryback. So my 2021 NOL would carry only as far back as 2019, I believe. Does that sound right?

There's one thing I'm hoping to get clarification on. My AGIs in past years are not  zero, but simply so small that when it's time to calculate taxable income in each year, taxable income has always been zero (since after 2015). Taxable income equals AGI minus standard or itemized deductions, correct? (Also minus QBI deduction, but that's always been zero for me, I think, because my business hasn't yet made a profit.) So while carrying back my 2020 and 2021 NOLs could reduce my AGIs in previous years, it would clearly due nothing to reduce my taxable income in those years beyond 2015, so I would get no actual benefit in the carrybacks for those years. So must I carryback the NOLs to reduce those AGIs anyway? Or is it not necessary since I already have no taxable income in those years?

It's all so complicated! Thanks for shedding light on it all!!

[AliciaP1]

Yes, you are correct.  You are required to "use up" the loss carryback on all existing AGI for the years that qualify in order to correctly calculate your carryover amounts.  Also, even though you have not had a profit, your income still is QBI, so you have QBI loss carryovers as well as your NOLs.  QBI does not carryback though and only offsets other QBI.  So your NOL carryover will be a different amount (lower) than your QBI loss carryover.

@zigzywno 

[zigzywno]

Thank you, @AliciaP1 !