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DH's parents established "Family LLC" to operate the motel they built in the 1980s. DH's father died in 1994 and his mother in 2009.

DH's sister, DS, has a degree in business. She continued to operate the motel but due to family problems neglected to file corporate and personal taxes starting in about 2012. She was executor of Mom's estate but failed to close it. DS is intelligent but unable to organize or execute tasks. DH took over Mom's estate and closed it in 2019.

DH helped DS sell the motel in 2019 just before it went bankrupt. The sale of the motel generated a Net Operating Loss (NOL) due to a large "Pass-through Loss and deduction item." The excellent tax accountant advised me on taking this NOL but unfortunately "fired" the "Family LLC" account due to a mess that I won't describe here so I can't phone her for advice.

I am now preparing DS's personal income tax returns for 2014-2019.

Since "Family LLC" sold the motel in 2019, the NOL comes under the CARES Act.

https://www.mwe.com/insights/individual-loss-carryback-refun...

The CARES Act allows individuals, estates and taxable trusts with certain business losses in 2018, 2019 and 2020, including losses from pass-through entities, to obtain refunds of taxes paid in the prior five years.

Under the CARES Act, an NOL from a tax year beginning in 2018, 2019 or 2020 can be carried back five years. ...Under the CARES Act, a taxpayer must carry back an NOL generated in 2018, 2019 or 2020 to the earliest year in the five-year carryback period. If the earliest year’s taxable income can’t absorb all or part of the NOL, then the taxpayer carries forward any remaining NOL to the next carryback year with taxable income (and so on) until the NOL used up....

Under the CARES Act, businesses can still carry forward NOLs indefinitely. Indefinite NOLs are NOLs generated in a tax year beginning after 2017. This indefinite carryforward period includes any NOLs from 2018, 2019 and 2020 that remain after they are carried back to tax years in the five-year carryback period.
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Because the motel fell on hard times, "Family LLC" reported an Ordinary Business Loss (Form K-1, Box 1) in every year from 2014-2019. I did the NOL calculation and attached it to every year from 2014-2018. This uses the 5-year carryback period required by the CARES Act.

Because of the operating losses, the NOLs in these years were larger than the original NOL from 2019.

Now to my question.

I am trying to prepare DS' 2019 1040. The 2019 K-1 reports the Box 10 Net section 1231 gain and Box 13 Pass-through Loss and Deduction Item which created the original NOL. However, the carry-forward NOL from 2018 is larger than the original 2019 NOL due to the ordinary business losses (Box 1).

How should I report the NOL(s) on DS' 2019 personal tax return?

Thank you!
Wendy
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Wendy, the way I understand your description, with the carryback just making losses even bigger, I think you should consider electing to forget the carrybacks and carry the NOL forward indefinitely. I seem to recall this topic came up when discussing your own situation. This election didn't go away with the CARES Act, the CARES Act just made the carryback period five years.

from the linked article:
https://www.mwe.com/insights/individual-loss-carryback-refun......
Section 2304 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act amended Code section 461(l) so that the excess business loss limitation now only applies to taxable years beginning after December 31, 2020. Consequently, individuals, estates and taxable trusts may offset their business losses for taxable years 2018, 2019 and 2020 against available non-business income for those years with any remaining business losses treated as NOLs. Section 2303 of the CARES Act amended the NOL carryback rules so that NOLs from taxable years beginning after December 31, 2017, and before January 1, 2021, can be carried back to each of the five preceding taxable years, unless the taxpayer elects to forego the carryback.

And, it's probably too late to mention it now, but doing 6 years' worth of returns, for a delinquent filer, with a sale of a business involved, with carryover losses, really isn't a DIY project. Even for a family member. I would have told her to find a new tax accountant.

Stories like this make me even more glad I'm retired.

Bill
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My suggestion would be to bundle it all up and get professional assistance. Bill (or someone, perhaps on a different board) mentioned the option to skip the carry back and carry the loss forward only. Unfortunately, that option is only available on timely filed returns. Since all of these returns are late, that is not an option.

I also have it in the back of my mind that there is a time limit for filing a refund claim based on an NOL carry back. I suspect that may affect some of the older returns. Further, if this situation arises, you have to treat the disallowed carry back as if it happened, even though any refund is barred by time.

In short, there are a whole bunch of issues here that haven’t been touched on yet. Hence my suggestion for professional help.

—Peter
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<I think you should consider electing to forget the carrybacks and carry the NOL forward indefinitely. I seem to recall this topic came up when discussing your own situation.>

Yes, you're right. I did bring this topic up when discussing my own situation.

The CARES Act has an obscure provision that the only option is the 5-year carryback - UNLESS the taxpayer cited an obscure part of the tax code BEFORE 12/31/2020 to elect the carryforward. I did this for my joint tax return, making the election for the carryforward. The IRS has sent me a letter approving this.


Statement Regarding Net Operating Loss, Filed pursuant to section 301.9100-2
We elected to waive the carryback period under Section § 172(b)(3) under Rev. Proc. 2020-24 for the taxable year 2019 when the loss occurred. We are carrying the Net Operating Loss forward into 2020.


But it's too late for DS so her (my) only option is the carryback. That's why I had to do all the tax returns going back to 2014.

<Stories like this make me even more glad I'm retired.>

Bill, you can't imagine the extent of this mess.

Wendy
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<I also have it in the back of my mind that there is a time limit for filing a refund claim based on an NOL carry back. >

You may be correct but it doesn't apply in this case. There was no filing and no tax paid so there will be no refunds. There are only losses so no tax is owed.

<Hence my suggestion for professional help.>

That may be necessary. But perhaps someone knows the answer to get me over this hump.

Thanks,

Wendy
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But perhaps someone knows the answer to get me over this hump.

Part of the problem is that what you see as a hump may actually be a sizeable mountain.

I'm not entirely sure what returns we're even looking at here. I'm not even sure if it's a trust or a partnership or something else. You mention an LLC and a K-1 and an estate (or trust). Who are the members in the LLC? Was a trust (or estate) income tax return filed? How about a return for the LLC? Did the LLC make any elections regarding it's filing status? It might be taxed like a partnership. Or a corporation. If there is just one member, it might be disregarded and all of the LLC activity reported on the sole member's return.

What I have is way more questions than answers at this point.

--Peter
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I'm not entirely sure what returns we're even looking at here. I'm not even sure if it's a trust or a partnership or something else. You mention an LLC and a K-1 and an estate (or trust). Who are the members in the LLC? Was a trust (or estate) income tax return filed? How about a return for the LLC? Did the LLC make any elections regarding it's filing status? It might be taxed like a partnership. Or a corporation. If there is just one member, it might be disregarded and all of the LLC activity reported on the sole member's return.

What I have is way more questions than answers at this point.


That is why I had my attorney draw up my will, etc., and appointed her (she is appreciably younger than I am) to be the executor of my estate. None of my friends are attorneys specializing in estate matters and State and Federal tax law.
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