Money Now Is Better Than Money Later
We know that Professional Service Companies (accountants, lawyers, engineers, consultants) did not get a fair shake with the tax reform bill as it stands, but the more I read about this bill, the more things go from bad to worse.
Another example – Net Operating Losses (aka NOL’s)
NOL’s are probably the one thing that takes the sting out of having net loss instead of net income. Let me explain.
Your firm is humming along, year after year, you have taxable income. Then it happens, instead of taxable income you have a taxable loss. The reasons for taxable losses can be many – invested in more staff, purchased a huge piece of equipment, lost a really-really big contingency case – you name it.
Under the current tax rules if you have a taxable loss, you can go back and apply that loss to taxable income you had in the past and voila – get a refund. This is called CARRYING BACK an NOL.
Let's say in 2014 you had a taxable income of $250,000 and at the tax rate of %30 you paid $75,000 in tax. But you had a loss of $150,000 in 2016 and carried that loss back to 2014, so instead of having taxable income of $250,000 in 2014, you had taxable income of $100,000 ($250,000 - $150,000). So, now your tax is only $30,000 ($100,000 @ 30%) but you paid $75,000, so the government gives you $45,000 back.
Now along comes tax reform...
If the republicans have their way, you will not be able to carryback that nice little NOL. Instead you will have to wait until you have taxable income in the future and then you can apply your NOL to that future income. What, you say; that is so unfair.
I could not agree more. NOL carrybacks were nice since you got to benefit from that loss almost immediately.
If you are not allowed to carryback and have to only carryforward, it could take one year, two years or infinity years for you to benefit from that loss. So, as a business owner, do you want refund now or refund later?
WE WANT REFUNDS NOW (we all say in unison)!
So, if we want to get a fair shake, email your congressman, senator, or even your professional associations. This tax reform bill has got to change otherwise we are going to have to be doing business in a whole different way.