Net Operating Losses Not All Bad News

Many businesses have experienced losses in the last couple of years and may again in 2010. Although this is generally bad news, net operating losses (NOLs) can be carried back to help small business owners claim refunds for tax they paid in prior years. These losses can also be carried forward to reduce future liability in the case that there is not substantial tax to recover from prior years.

Besides being able to carry back or carry forward NOLs, there is the possibility that business owners could reap a tax benefit in the current year. Perhaps one of the biggest changes for individuals in 2010 is the ability to convert a Traditional IRA into a Roth IRA with no income limitation. If a partner or shareholder of a business expects to have an NOL in 2010 and is considering converting to a Roth, it may be time to pull the trigger.

Business losses, which would otherwise generate an NOL, can offset income generated by the Roth conversion and prevent taxpayers from being taxed in a higher than normal tax bracket – not to mention lowering their tax bill in general. In addition to the long term benefits of converting to a Roth IRA, this strategy allows taxpayers to benefit immediately from current year business losses.