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Many young or beginning farmers may find that their projected farm expenses exceed anticipated farm receipts for the current tax year. These farm losses may be experienced during a start-up period. However other losses may be the result of unexpected events. For some producers, farm losses may generate cash inflows in the form of tax refunds. Tax law allows choices with respect to farm losses. Farm losses realized in one tax year may be carried back 2 years or 5 years1 to obtain refunds of taxes previously paid. If the loss is not carried back, or if the full loss is not used (absorbed) in the carryback years, the loss may be carried forward to offset income and tax liabilities in future years. Therefore, producers with farm losses should analyze their carryback and carryforward alternatives.
A net operating loss (NOL) and a farm loss reported on Schedule F (Form 1040) are often not the same because of differences in income and expense items included. The NOL concept is simple, but computation of the NOL deduction and NOL carryback can be quite complex. This complexity arises because various tax benefits must be removed by modifying the deductions from the loss year and modifying the income in the carryback year or years. Similar modifications are made if the loss is carried forward. Because of these modifications, the tax benefits of the loss may be reduced significantly. This article addresses some possible loss situations and general strategies for farmers to avoid an NOL, if possible.
Rural Tax Education
choices, farm, operating loss
Education | Higher Education | University Extension
Patrick, George F., "Choices for Your Farm Operating Loss" (2010). Rural Tax Education. 11.