The Tax Blotter - August 3, 2023 - CPA Practice Advisor

The Tax Blotter is a round-up of recent tax news, case rulings and IRS actions.

Under current law, net operating losses (NOLs) can no longer be carried back for two years, but they may be carried forward indefinitely.

Bear the burden of proof. NOLs can offset current income but you must observe the rules for substantiating deductions. Generally, if the IRS challenges a write-off, you bear the burden of establishing both the existence of the NOL and the amount to be carried over to the year in question. As shown in a recent case, you can’t simply rely on the claims made on the tax returns for the prior years (Amos, TC Memo 2022-109, 11/10/22).

Alert to pass-through entities. The IRS is paying closer attention to NOLs claimed by partners in partnerships and shareholders in S corporations. These items are passed through on their personal returns and could offset highly-taxed income. But losses are allowed only to the extent of their adjusted basis in their business interests. Any excess loss must be carried forward to a return for a year in which the taxpayer has sufficient basis. Expect the IRS to audit more returns with these write-offs.

Establish any debts. Make sure that business debts are legitimate when claiming NOLs carryforwards. In a new case, couple had asserted they had large NOLs relating to their limited liability company (LLC) in prior years. But the IRS disallowed the NOL carryforward amount. Reason: It said that the couple failed to prove that they had sufficient basis in the LLC interests. The couple had claimed that a $2.7 million promissory note given to the LLC increased their basis, but the Tax Court ruled the note wasn’t a bona fide debt (Bryan, TC Memo 2023-74, 6/20/23).