Net Operating Loss – Do You Go Back or Go Forward

Many dairy and other farmers will need to make a decision this year that they may not have had to make for several years.  I would say almost all dairy farmers for 2009 will have a tax operating loss and it may be substantial.  With a net operating loss, the tax laws allow you in most years to  either carry it back for two years or carry it forward for up to 20 years.

However, for farmers they can carry back their net operating losses for up to five years and if they have losses from other businesses for 2008 or 2009, they can carry those losses back for up to five years.

You need to review your actual income tax paid for the last five years.  You will need to determine the amount of tax actually paid and the overall tax bracket that you were in for each year and in total for the appropriate years.

• You need to estimate what your income tax bracket will be over the next few years.  In general, if the prior years overall tax bracket is 15% or less and you expect to be in the 25% or higher bracket going forward, it makes more sense to carry it forward.
• You need to review whether you took advantage of farm income averaging in those years and whether you will take advantage of it going forward. 
• If the loss is very large and you need the cash, carry back the loss and what is left over can still be carried forward to 2010 and beyond.
• You can elect to carry the non-farming loss back three, four or five years or the normal two.

If you make no election, then the loss is automatically carried back two or five  years.  To carry it forward, you must make an election with the tax filing.

Here is a link to the IRS website dealing with the net operating loss rules for farmers and other related farm tax publications and links.