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Hey it's tax quips time from tax mama calm today tax mama hears from several people in the tax Clips forum about this topic net operating losses have some special qualities that make them very desirable for tax purposes even when they result from disasters in an economic sense it's important to understand how to use them or you can waste them well my friends net operating losses or NOLs as we are going to call them arise primarily from three areas on the tax return business losses casualty losses and losses on the sale of business property that has not been fully depreciated these special qualities of NOLs include one being fully deductible rather than limited to the $3,000 per year like capital losses two they're able to reduce all income not just capital gains three you can get refunds quickly within a couple of months after you file the tax return that has the NOL you file a special form a form 1040 five before December of that year to get a quick refund and four if the losses are higher than all the income on the tax return you can use them in the past or the future kind of like science fiction and time travel note state laws will vary so get to know your state rules currently you can carry the losses back to your tax return two years earlier in the recent past you were able to carry the animal back as far as five years you can carry the loss forward for twenty years as an alternative and whatever you don't use in the first carry back or carry forward year can be used in the subsequent year and my friends therein lies the problem the average person who knows about carry forwards just assumes they can use the losses next year you may but only if you make a specific election a statement with the tax return saying you want to give up your right to carry the losses back the tax return that has the NOL must include a statement like this taxpayer elects to forego the carry back period under Internal Revenue Code section 172 B 3 if you don't include the statement you have no choice you must carry the loss back to two years ago then whatever is left to future years now the idea of the carry back wasn't to punish you it was to give you the opportunity to get refunds quickly in hard times by amending the earlier years using that form 1040 five I mentioned you could get a refund in a month or two instead of waiting until the following years tax return needed to be filed and not everyone wants to carry losses back either that year's tax bracket is quite low in the following years as much higher or they don't want their tax returns scrutinized and to make the audit statute-of-limitations yet another year longer also when you carry.