Masonry Magazine October 1999 Page. 18
Net Operating Losses
A net operating loss (NOL) occurs when a masonry contractor's business deductions exceed its gross income. An NOL can be carried back to offset income in prior years and carried forward to offset income in future years.
Generally, an NOL is first carried back to the third taxable year preceding the loss year. If the taxable income for the three preceding years is not sufficient to absorb the entire loss, any remaining loss is first carried to the year immediately following the loss year, then to the second year following the loss year, and so on for up to 20 years until the loss is eventually used up. Naturally, if the masonry business closes its doors before the NOL carryover is used up, it is claimed in its entirety on the final tax return.
A masonry contractor entitled to a NOL carryback period can choose to forego the entire carryback period. If the election is clearly made, the loss may be carried forward only, an excellent strategy when profits and tax bills were small or nonexistent in earlier years.
Involuntary Conversions
An involuntary conversion is a loss that results from the sudden destruction of an asset by nature, as by fire, storm, or flood. An involuntary conversion may also result from condemnation, that is the taking by government of property for public use with compensation usually being paid. All, have tax consequences.
Where a contractor's property is converted involuntarily or by compulsion into other property similar or related in service or use to the converted property, recognition of gain can be deferred or postponed. What's more, any money received on the conversion need not be recognized if an equal amount is spent to acquire property similar or related in service or use to the converted property.
Replacement means (a) the acquisition of other property similar or related in service or use to the property converted or (b) the acquisition of 80 percent control of a corporation owning such other property. Naturally, an actual purchase must take place, an enforceable contract to purchase is not sufficient.
However, if real property used in the masonry contractor's trade or business (other than inventory or property held primarily for sale) or held for investment is seized, requisitioned, condemned or disposed of under threat or imminence, thereof, the replacement property may be of "like kind" if held either for productive use in trade or business or for investment. This "like-kind" test does not require a similar use for the replacement property, does not apply to acquisitions of 80 percent of a corporation owning such property or to involuntary conversions by fire, storm or other casualty.
The replacement period ends two years (three years for certain real estate) after the close of the first tax year in which any part of the gain on the conversion is realized. The IRS may extend the replacement period upon application of the taxpayer.
For business or investment real property (other than inventory), the replacement period is three years, rather than two years, after the close of the first year in which any part of the gain upon conversion was realized.
Disaster Losses
Any masonry contractor that sustains a loss from a disaster in an area subsequently determined by the President of the United States to warrant federal assistance, may use a special rule to help cushion the loss. In fact, disaster losses may be retroactive.
Every masonry contractor has the option of (1) deducting those disaster
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