Masonry Magazine October 1999 Page. 17
Profiting From Losses
Losses are an inevitable part of every masonry business. Fortunately, almost every type of loss can be minimized through good management or, in most instances, turned into a badly-needed infusion of cash for the masonry operation.
At one end of the spectrum, many contractors suffer lost, misplaced, broken or stolen items that are easily accounted for as "inventory shrinkage." Those inventory losses that can't be eliminated through management reforms reduce the end of year inventory figures and are thus turned into a tax write-off.
Theft, fire, wind and storm damage, on the other hand, result in a casualty loss and in some cases, an immediate tax write-off that produces a refund of already paid income taxes.
Often overlooked is the so-called "abandonment loss" that results whenever any of the equipment or assets used in the masonry operation are abandoned no longer useful, used or needed by the contracting business.
Even the net operating losses (NOLs) that result when tax deductions and write-offs exceed the masonry operation's income, can often be used to help the business turn itself around. A net operating loss can produce a refund of taxes paid in prior, more profitable years, or used to reduce future tax bills as the masonry operation's fortunes improve.
The key to "profiting" from these and other losses, is to take full advantage of all of the tax benefits that each creates. Naturally, the tax rules are different for each type of loss and often complex, but tax deductions, write-offs and benefits do exist for all losses incurred by the masonry contracting business.
A loss is deductible only for the tax year in which it is sustained. In other words, the year in which its occurrence is evidenced by a closed and completed transaction and is fixed by identifiable events occurring in that tax year.
Bad Debts
Business bad debts differ from non-business bad debts in that they can be deducted to the extent of their worthlessness at any time that they become totally or partly worthless. A cash basis masonry contractor can deduct a bad debt only if an actual cash loss has been sustained or if the amount deducted had already been included in income.
Abandonment Losses
A loss is allowed for the abandonment of an asset if the contractor "manifests an intent to abandon it makes some affirmative act of abandonment." The amount of the abandonment loss is usually the masonry contractor's adjusted basis in the asset or its book value.
If a depreciable business or income-producing asset loses its usefulness and is abandoned, the loss, as mentioned is equal to its adjusted basis or book value. However, this loss must be distinguished from anticipated obsolescence.
If a nondepreciable asset is abandoned following a sudden termination of its usefulness, a loss is also allowed in an amount equal to its book value. In fact, this applies to the abandonment of an enterprise as well as to the abandonment of intangible assets such as contracts.
Foreclosure Loss or Tax Sale
Where the owner of an equity interest receives less than his basis or book value in real estate when it is sold upon foreclosure of the mortgage, his investment may represent a deductible loss only if the property foreclosed upon is business or investment property. The nature of the loss capital loss or ordinary loss depends, in each case upon the nature of the property foreclosed upon, i.e., whether it is a capital asset or required to be treated as a capital asset.
NOLs
Nearly every masonry contractor is allowed to carry back a net operating loss from a trade or business to apply as a deduction against prior income and to deduct from succeeding years' income any unabsorbed loss. Generally, NOL deductions are not available to partnerships or S corporations, although investors may use their distributive shares to calculate individual NOLs.
Today, a NOL can be carried back two years. A NOL is first carried back to the second year before the NOL year; if not entirely used to offset in-