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Schedule C - NOLs and 199A

Technical topics regarding tax preparation.
#1
Erin_EA  
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Pittsburgh, PA
Newbie here. Can anyone help with a tricky multi-part question?

Background- I’m assisting a taxpayer with a Schedule C business that posted losses from 2014 – 2017, then earned a profit in 2018. He did not attach statements waiving the two-year NOL carryback period to any of those prior returns. Nor did he file Forms 1045. Each year, he had some W-2 wages as well, but the Schedule C losses always exceeded the wages (i.e. negative AGI every year.)

1. Am I okay to carry forward the 2016 and 2017 NOLs to offset his 2018 profit? I know he has no income to which to apply the losses for 2014 or 2015, but 2013 and prior, not sure.

2. If I’m understanding Worksheet 1 in Pub 536 (https://www.irs.gov/pub/irs-pdf/p536.pdf) correctly, the amount of the NOL does NOT include a standard deduction or personal exemption, correct? Seems like the IRS would not be that generous! Since he has none of the other items listed (business capital losses/gains, DPAD, etc etc), his NOL is simply the amount by which his Schedule C loss exceeded his wages, right?

3. Of course, in 2018, we have the new 199A deduction to consider! He has a SERVICE-based business but is well below the $157,500 Single income threshold, so he’s going to be entitled to 20% deduction regardless of business type, right?

My first draft of the return here, I have the 20% deduction on Line 9 of the 1040 and I put the NOL as a negative number on Line 21 of Schedule 1 “Additional Income and Adjustments to Income.” There is enough NOL to wipe out the 80% of income remaining after the 199A deduction.

4. Even though I think I can exclude all the profits from his taxable income, pretty sure he’s still liable for the self-employment tax. SE tax is assessed on the net profit (Line 31 of Schedule C) BEFORE subtracting the 199A and NOL, right?

5. Ok, so now that I’ve wiped out Schedule C income via Section 199A and NOL carryovers, he’s left with only about $9K of W-2 wages on which he will owe income tax. Normally income that low would trigger possible Earned Income Credit. But EIC eligibility is probably based on Schedule C Line 31 (net profit), similar to SE tax…right?

I would be so grateful for anyone to weigh in, and I will try my best to help with your questions in return. Thanks! :)
 

#2
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Wasilla, AK
1. You should be. If the taxable income before exemptions on both 2014 and 2015 (Line 41 or thereabouts) are zero or less, than none of the NOL is "used up" in either of those years.

2. Practically correct. Technically, it's the taxable income before exemptions, but after adding back in the excess of nonbusiness deductions over nonbusiness income. So if a proprietor has -$10,000 on 2017 Schedule C, $100 interest, and a $6,350 standard deduction, you start with the TIBE of -$16,250 and add back ($6,350 - $100 = $6,250), arriving at the NOL of $10,000.

3. The 20% deduction is also limited to taxable income (less QD&LTCG). So if the proprietor from the previous example has business income of $23,000 in 2018, the $10,000 NOL, the $1,625 SE Tax deduction, and the $12,000 standard deduction are already enough to wipe out all taxable income, and there is no QBID. If instead the proprietor had $30,000 Schedule C income, the NOL, SE Tax deduction, and standard deduction already reduce the taxable income to $5,880, and the QBID reduces that by 20% of what's left (a deduction of $1,176).

4. Correct. Self-employment tax is not affected by NOLs or 199A deductions.

5. Earned Income is defined as wages plus net earnings from self-employment, and net earnings from self-employment is defined as SE profit (Sch C or Sch F) minus the SE tax deduction. Look that up in the EIC table. If AGI is higher than Earned Income, you have to also look up the AGI in the EIC table, and take the lower credit amount between the two results. In your client's case, AGI is lower than the Earned Income, so there is no adverse effect from the NOL. The QBID does not affect AGI, so it is not a factor at all in computing EIC.

I'm sure I've overlooked some minor details, but that should be correct for your client's situation.
 


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