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Sorry, but Securities Traders were generally not able to use the Mark-to-Market method before 1997.

 

Special situation for a taxpayer's initial tax return

All the aforementioned election filing deadlines pertain to individual taxpayers who were required to file and who actually did file at least one tax return prior to making the Mark-to-Market election.  For those taxpayers who are filing their first ever tax return, no filing deadlines for a timely mark-to-market election have been established, other than that the election statement (as previously described) be placed in its books and records immediately in the first year and that a copy also be attached to the first original federal income tax return filed.  Typically this pertains to taxpaying entities other than individuals, such as a newly formed corporation or LLC.   Click here for more on this sophisticated option.     Click here to form your entity right away.  

Roth IRA  |  Roth 401(k)  tip 

TIP: If you are a trader who timely filed a M2M election and you incurred huge losses in the stock market during the year, here's a tip - rather than using the resulting Net Operating Loss (NOL) as a 2-year carryback (occasionally a 5-year carryback), consider a timely filed NOL election to carry it forward only.  Then convert a portion (or all) of your retirement plans & traditional IRAs to tax-free Roth IRAs (or do an in-plan Roth 401(k) conversion) , using the NOL carryforward to shelter the taxes currently due on the conversion.  We can prepare the appropriate elections for you to file.  Become a client here to discuss what plan of action is advisable for you.

By doing this your heretofore full taxable (in the future) retirement plans & traditional IRAs will become non-taxable for income tax purposes (they generally remain taxable for estate tax purposes).  All future year's growth will then be income tax free, where the growth was only income tax deferred before converting to a Roth.   Caution: Of course the income tax law could be changed in the future.  Remember that at one time Social Security benefits were not taxed, and even after they changed the law and started taxing 50% and then 85% the members of Congress denied that it was an income tax increase!

Suggestion for effectively using recharacterizations: You may generally change your mind and undo the Roth conversion up until your form 1040 filing deadline.  Any gains/losses in that one particular Roth account are then blended and after that computation, the recharacterization amount is adjusted up or down to reflect this.   Therefore when doing your conversion, consider transferring over to two or more Roth accounts.  Use one Roth conversion account for conservative investments that will not likely drop in value.  Use one or more other Roth accounts for more aggressive trading where it is possible that you could incur a significant drop in account value.  If a year later it turns out that you lost value in that aggressive account, you would need to strongly consider recharacterizing that one account back so that the 1099-R income will not need to be picked up as taxable income.  (please note that in-plan Roth 401(k) conversions may not be recharacterized)

2010 - 2013 Roth IRA tip

TIP: Effective 2013, interest and dividend income reported on an individual's form 1040 will be subjected to an additional 3.8% tax (when the AGI is over $250,000). 

By converting to a Roth prior to 2013, retirees with AGI's that otherwise might go over $250,000 due to retirement plan payouts - can avoid this additional 3.8% tax add-on for years into their retirement.   This legal manipulation of increasing one's current taxable income and decreasing one's future taxable income will only work out to be beneficial for certain taxpayers whose incomes fall in the appropriate ranges.

Roth IRA tip starting in 2010

TIP: Effective 2010, many higher-income taxpayers who are denied a current Roth IRA contribution, may generally make a traditional, non-deductible IRA contribution and then the following day convert that into a Roth IRA. 

Not really any different than converting a traditional, non-deductible IRA into a Roth IRA as was done in prior years, except that starting in 2010 most individual taxpayers may convert into a Roth IRA.  Whereas, prior to 2010 higher-income taxpayer were prohibited from making a Roth conversion.

Net Operating Losses

  • Net Operating Losses (NOLs) generally can be used to offset other taxable income in prior years and in future years.  Individuals need to decide at the time that they file their form 1040 (if it shows a current year NOL) whether they want to carry forward the loss to offset future taxable income, or to carry the loss back two years or back five years and recoup taxes paid, plus occasionally even some interest on the money! (see discussion below about interest payments). The odds of an audit are much higher when an individual trader's NOL carry back is filed using form 1045 or 1040X.  But if all your ducks are in a row, the result is a refund of taxes paid at your higher tax brackets from 2000 or 1997 for a loss incurred during 2002 (for example).  Or refunded from 2003 for a loss incurred during 2005, as another example

    Optionally an election may be filed with a timely filed 2005 form 1040 to carry forward the NOL, rather than going back for refunds.  The odds of audit when taking this approach are far less because there is no manual examination of the forms 1045 and 1040X along with your prior year 1040s.   A trader might decide to carry forward if he was in low tax brackets in prior years, expects to be in higher tax brackets in future years, or if there are significant skeletons in the closet with his prior returns.   There is no sense of potentially opening a can-of-worms looking for a refund of prior year taxes if the prospects of going forward are more advantageous.

    Another detriment of carrying back is that on the way back the taxpayer often forfeits many deductions, credits and exemptions that he originally was entitled to, thereby reducing the net benefit of the deductible NOL.

    In summary, when an individual trader's tax year 2002 M2M losses are large enough to create a NOL he must first decide whether to carry back or to carry forward the loss.  If he elects to carry back, he must then decide to carry back two years to 2000 or five years to 1997.   In all three of these cases if the year the NOL is carried to does not fully use up the NOL amount, then the remaining unused portion of the NOL is carried forward to be applied year-by-year.


    Update: On November 20, 2003 House Lawmakers voted to revive the five-year NOL carryback, which was set to expire.

    House taxwriters Jerry Weller, R-Ill., Dave Camp, R-Mich., Jim Ramstad, R-Minn., Kevin Brady, R-Texas, Phil English, R-Pa., Scott McInnis, R-Colo., and Philip M. Crane, R-Ill., linked the NOL provision to a recent economic resurgence. 

    The refunds that resulted from these NOL carrybacks were used to hire and retain workers and to make capital investments that provided stimulus to the economy," the taxwriters wrote Thomas in a November 17 letter.

    Further Update: The five-year NOL carryback has expired. It only applies for net operating losses for taxable years ending during 2001 or 2002.

    Update: January 2008.   Congress is planning for a five year carryback provision again - for 2007 & 2008.

    Update: April 2008.   Congress is planning for a four year carryback provision and a 7+ year carryback provision - for 2008 & 2009.

    Update: Later in 2008.   Certain Disaster Relief areas have now been granted a 5 year NOL carryback provision.


    Update: February 2009.   The President has signed The American Recovery and Reinvestment Act of 2009 which calls for an "up to 5 year NOL carryback" for M2M traders.   Generally speaking this covers 2008's net trading losses for all securities trades who have properly elected M2M for calendar year 2008  and separately, covers 2008's net trading losses for all futures trades who have properly elected M2M for calendar year 2008.


    Certain problems have arisen that have resulted with some taxpayers seeing delayed, denied or frozen NOL refunds. 

    We have been retained for engagements to successfully resolve these for taxpayer who've filed NOL's in 2009.  Both on a per hour fee arrangement or a contingency arrangement. 

    Three areas have been noticed:
  • administrative delays, including "lost" paperwork at the federal and state levels.
  • denial of the NOL carryback election to 2003, 2004 or 2005 - claiming that the taxpayer was limited to electing a carryback to 2006, and now facing a "catch 22" because the election they did make is irrevocable.
  • frozen refunds that total $10MM or higher and "improperly frozen" accounts as uncovered by the Treasury Inspector General for Tax Administration TIGTA.



    An applicable 2008 NOL is the taxpayer’s NOL for:

    •  
      • any tax year ending in 2008, or,
      • at the taxpayer’s election, any tax year beginning in 2008. (Code Sec. 172(b)(1)(H)(ii)(II))


    Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:

    •  
      • any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
      • any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
      • any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.


    On March 16, 2009 IRS issued Rev. Proc 2009-19  and News Release and a Q&A document to provide guideance regarding the new NOL carryback provisions.
    IRS also issued Rev. Proc 2009-26  and Rev. Proc 2009-52 

    During March 2009 the IRS issued revised instructions for form 1045.
    During February 2009 the IRS issued updated instructions for form 1040X.

    Expect audits of the potential deluge of self-prepared NOL cases:  IRS internal NOL Examination Officer's Guide



    Some comments (below) are from various sources while the actual law is being analyzed and implemented (we have lined through text that we believe is in error):


    Net Operating Loss (NOL) Carryback: As part of the $787 billion recovery package recently passed by Congress and signed by President Obama, businesses with annual gross revenues of under $15 million can shift any 2008 losses back five years. This change-the normal carryback limit is two years-allows struggling start-ups and small businesses to even out their receipts over a greater amount of time. For instance, a business that lost $500,000 in 2008 might shift that balance back across the tax years of 2005, 2006, and 2007; years that it made profits of $50,000, $150,000, and $300,000, respectively. By amending its tax returns through NOL carryback to now show no profits for those three years, that small business could generate some much needed capital in the form of tax refunds for those three years. Some caveats, however: An overwhelmed IRS is likely to take months, if not longer, to process and send out these refunds (for an expedited refund, file IRS Form 1139: http://www.irs.gov/pub/irs-pdf/f1139.pdf). Also, note that NOL carrybacks are only available to small businesses formed as C-corporations.


    Extended NOL Carryback for Small Businesses. The Act allows "small businesses" (generally corporations or partnerships with average gross receipts for the trailing three-year period of $15 million or less) to elect to carry back net operating losses for taxable years ending in 2008 (or if the small business elects for taxable years beginning in 2008) for a period of up to five years. The estimated cost is $4.7 billion in 2009 with future year savings for a net 10 year cost of $947 million.

    Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, NOLs may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less. This provision applies to an NOL for any tax year ending in 2008 or at the small business' election, any tax year beginning in 2008. If the return for 2008 is April 20, 2009. There are three special transition elections that must be made on or before April 16, 2009, if the small business has an NOL for a tax year ending before February 17, 2009.

    The $15 million limitations is based on average annual gross receipts for the three tax year period ending with the tax year in which the loss arose. Receipts of all related business entities must be aggregated for purposes of applying the average annual gross receipts test. Because the stringent single employer and affiliated service group aggregation rules apply, it is likely that a large number of otherwise qualifying businesses structured as S corporations, partnerships and limited liability companies (LLCs) will not qualify for the extended carryback period.

    Part 2: 5-Year Carryback of Operating Losses - (Sec. 1411) Extends from two to five years the carryback period for net operating losses incurred in 2009 or 2010. Disqualifies for such extension: (1) taxpayers receiving assistance from the Troubled Assets Relief Program (TARP); (2) the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); and (3) taxpayers that are members of the same affiliated group of entities in 2008 or 2009.

    Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) could be carried back to the two years before the year that the loss arose and carried forward to each of the succeeding 20 years after the year that the loss arose. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less. Such a small business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period. A carryback can generate a refund because it allows the business to offset income that has already been taxed. The "applicable NOLs" for which an eligible small business may elect the increased carryback period are NOLs for tax years ending in 2008 (or, for fiscal years, if the taxpayer so elects, NOLs for tax years beginning in 2008). As tax years ending in 2008 have already occurred, the new law provides some transitional relief that may require certain actions to be taken no later than April 19, 2009. Some planning may be appropriate to create or increase the amount of an applicable 2008 NOL, such as the use of accelerated depreciation or expensing of assets acquired in 2008.


    If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009.

    Generally small businesses that are not corporations (including sole proprietorships filing schedule C with their Form 1040) may accelerate a refund by using Form 1045, Application for Tentative Refund.

    Corporations with NOLs may also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.

    The IRS will be closely monitoring these filings and will provide additional staff as needed to process these forms. The IRS will work to issue refunds within 45 days or even earlier to the degree possible.

    In addition, Questions and Answers have been posted on this Web site. Small businesses that file Form 1040 can also call 1-800-829-1040 with NOL questions. Corporations can contact 1-800-829-4933 with NOL questions.

    Form 1045 or Form 1139, whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. In addition, the current year’s tax return must be filed by the date the Form 1045 or Form 1139 is filed. Form 1045 and Form 1139 are filed at the same place the taxpayer’s return is filed, as listed on the return instructions.

    Accelerated refunds paid via Form 1045 or Form 1139 are described as "tentative" because the applications for refunds are potentially subject to review at a later date. Form 1045 Instructions and Form 1139 Instructions provide more information on the accelerated refund option.
    IRS site   infoZine site   Roni Deutch blog
     


    Net Operating Loss Deduction

    TheTaxBook™ 2008 Tax Year 1040 Edition, page 8-1 and 8-16 and the Small Business Edition, pages SB8-2 and SB8-7. For 2008 only, the new law allows taxpayers to extend the NOL carry back period from 2 years to 3, 4, or 5 years for small businesses with gross receipts of $15 million or less. The 3, 4, or 5 year alternative carry back period provision is by election. The election to use an alternative carry back period must be made by the due date of the return, including extensions. Once made, the election is irrevocable.


    How small businesses can take maximum advantage of the new longer 2008 NOL carryback

    The American Recovery and Reinvestment Act of 2009, signed into law on Feb. 17, 2009 ( P.L. 111-5 , the “Recovery Act”) allows qualifying small business to choose a three- four- or five-year net operating loss (NOL) carryback period for certain losses instead of the usual two-year period. This Practice Alert explains the details of this new provision and the planning that should be undertaken to ensure that a qualifying business chooses the carryback period that will yield maximum tax benefits for the business, taking into account the carryback itself and its tax picture for this year and previous years.

    Background. A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

    In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

    Different rules apply for certain types of losses. For example, a three-year carryback is allowed for an eligible loss, including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. A five-year carryback is allowed for a farming loss, a qualified disaster loss, and certain amounts related to specified disasters.

    New law. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 NOL (the “applicable NOL”) from 2 years to any whole number of years which is more than 2 and less than 6. (Code Sec. 172(b)(1)(H), as amended by Act Sec. 1211(a))

      RIA observation: In other words, an eligible business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.

    A small business for this purpose is a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (under Code Sec. 448(c), as modified) for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose are $15 million or less.

      RIA observation: The increased carryback period can generate a refund for a small business because it allows the taxpayer to offset income that has already been taxed. Under pre-Recovery Act law, a taxpayer couldn't use the NOL to offset the taxable income for the fifth, fourth, and third tax years preceding the NOL year, and so couldn't have received a refund of the tax paid on those amounts.

      RIA illustration 1: ABC, Inc., an eligible small business, has an “applicable NOL” for 2008. It had taxable income for 2005 (and paid the applicable federal income tax), but not for 2006 or 2007. ABC elects a 3-year carryback for the NOL, and carries it back to 2005. The NOL wipes outs ABC's 2005 taxable income, entitling it to a refund of the tax it paid on that income. Under pre-Act law, the NOL could have been carried back only 2 years, to 2006 and 2007. Because ABC had no taxable income for either year, the carryback wouldn't have resulted in a refund. ABC would have had to wait until later years when it had taxable income to get any tax benefit from the NOL.

      RIA recommendation: The small business should use the tentative (or “quick”) carryback procedures (under which taxpayers can recover a refund attributable to an NOL carryback before IRS processes the return filed for the year the NOL arises to expedite the recovery of the refund. That way, the taxpayer won't have to wait until IRS processes the return for the NOL year to get the refund. Presumably, the taxpayer will have to indicate the increased carryback election on the claim form (Form 1045 for individuals, Form 1139 for corporations).

      RIA observation: The key factor in deciding whether to elect to carry an NOL back three, four, or five tax years should be which election will result in the largest tax savings. Thus, if the NOL is more than or at least equal to the taxpayer's combined income for the third, fourth, and fifth years before the year in which it arose, then the loss should be carried back to the fifth year so that it can be used in all three years (see RIA Illustration (2), below). On the other hand, if the NOL is less than the combined income for those three years, the taxpayer should try to carry it back to the year(s) in which his income was taxed at the highest rate so as to get the highest refund (see RIA Illustration (3), below). In some cases, it may be better to not make the election because the largest tax savings will come from carrying the NOL back to the second year before the year in which the NOL arose (see RIA Illustration (4), below).

      RIA illustration 2: Taxpayer, a calendar-year C corporation, has an NOL of $200,000 for its 2008 tax year. It had taxable income of $50,000 in 2003, $50,000 in 2004, and $100,000 in 2005. It had taxable income of $25,000 in both 2006 and 2007. Taxpayer paid federal income taxes of $7,500 on its 2003 income, $7,500 on its 2004 income, $22,250 on its 2005 income, and $3,750 on its income for both 2006 and 2007. If Taxpayer elects to carry its 2008 NOL back five years, the NOL will completely offset its income for 2003, 2004, and 2005 ($50,000 + $50,000 + $100,000 = $200,000), and it will be entitled to a refund of $37,250 (the sum of the taxes it paid for those three years).

      If Taxpayer carries the NOL back only four years, it will completely offset its income for 2004, 2005, 2006, and 2007 ($50,000 + $100,000 + $25,000 + $25,000 = $200,000), and will also result in a refund of $37,250 (the sum of the taxes paid for those four years), but it will mean that the income for 2007 will not be available to offset any NOL taxpayer may possibly have in 2009.

      If Taxpayer carries the NOL back only three years, it will completely offset its income for 2005, 2006, and 2007 ($100,000 + $25,000 + $25,000 = $150,000), and $50,000 ($200,000 $150,000) of the loss can be carried forward to 2009. However, it will result in a refund of only $29,750 (the sum of the taxes paid in those three years).

      RIA illustration 3: Assume the same facts as in RIA Illustration (2), except that in 2005, Taxpayer had taxable income of $300,000 on which it paid federal income taxes of $100,250. If Taxpayer elects to carry the NOL of $200,000 back five years, it will completely offset the income of $50,000 for 2003 and 2004, and $100,000 of the income for 2005. Because the income for 2005 above $100,000 is taxed at a rate of 39%, this will result in a refund of $39,000 (39% of $200,000 [$300,000 $100,000]) for that year and a total refund of $54,000 ($7,500 for 2003, $7,500 for 2004, and $39,000 for 2005).

      However, if Taxpayer carries the NOL back only three years to 2005, it will be entitled to a refund of $78,000 (39% of $200,000, the taxable income for 2005 over $100,000).

      RIA observation: Because in RIA Illustration (3), the income for 2003, 2004, and 2005 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2005 if carrying it back to that year will result in the largest tax refund.

      RIA illustration 4: Assume the same facts as in RIA Illustration (2), except that Taxpayer had taxable income of $300,000 in 2006. Taxpayer will get the largest refund if it does not elect to carry the NOL back beyond two years. By carrying it back to 2006, it will get a refund of $78,000 (39% of the taxable income for 2005 over $100,000). If Taxpayer elected to carry the NOL back five years, it would get a refund of only $37,250 as shown in RIA Illustration (2). If it carries the NOL back four years, it would get a refund of $49,250 ($7,500 for 2004, $22,250 for 2005, and $19,500 [39% of $50,000] for 2006). If it elected to carry the NOL back three years, it would get a refund of $61,250 ($22,250 for 2005 and $39,000 [39% of $100,000] for 2006).

      RIA observation: Because in RIA Illustration (4), the income for 2006 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2006 if carrying it back to that year will result in the largest tax refund.

    What is an “applicable 2008 NOL”? An applicable 2008 NOL is the taxpayer's NOL for:

      • any tax year ending in 2008, or,
      • at the taxpayer's election, any tax year beginning in 2008. (Code Sec. 172(b)(1)(H)(ii)(II))

    An election under Code Sec. 172(b)(1)(H), made in the manner prescribed by IRS, must be made by the due date (including extensions) for filing the taxpayer's return for the tax year of the NOL. (Code Sec. 172(b)(1)(H)(iii)) Any such election is irrevocable. Additionally, any carryback election under Code Sec. 172(b)(1)(H) may be made only with respect to one tax year. (Code Sec. 172(b)(1)(H)(iii))

    Excess interest losses. If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an “excess interest loss” (i.e., interest allocable to the CERT) for a “loss limitation year,” the loss is an NOL. It's subject to the regular NOL carryback and carryover rules, except that it can't be carried back to a tax year before the year in which the CERT occurred. The “loss limitation year” is generally the tax year in which the CERT occurred (the “CERT year”) and each of the next two tax years.

    Under the Recovery Act, if an eligible small business makes a Code Sec. 172(b)(1)(H) election to increase the carryback for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.” (Code Sec. 172(b)(1)(H)(i)(II))

    “Eligible losses.” Code Sec. 172(b)(1)(F) prescribes a 3-year NOL carryback for “eligible losses,” including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. The Recovery Act provides that Code Sec. 172(b)(1)(F) doesn't apply to an applicable 2008 NOL for which a small business taxpayer has made a Code Sec. 172(b)(1)(H) election. (Code Sec. 172(b)(1)(H)(i)(III))

    Alternative tax net operating loss. An alternative tax net operating loss deduction (ATNOLD or ATNOL deduction) is allowed for alternative minimum tax (AMT) purposes instead of the regular NOL deduction.

      RIA observation: The regular tax NOL deduction and the ATNOLD are governed by a single carryback period. Thus, the increased carryback elected for the 2008 NOL also applies for the ATNOLD in computing AMTI.

    Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:

      • any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
      • any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
      • any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.

    Anti-abuse rules. Act Sec. 1211(c) gives IRS authority to issue rules necessary to prevent the abuse of the purposes of Act Sec. 1211, including anti-stuffing rules, anti-churning rules (including rules relating to sale—leasebacks), and rules similar to the rules under Code Sec. 1091 relating to losses from wash sales.


    Longer Carry-Back Period for 2008 Losses

    The Stimulus Act temporarily allows eligible businesses to carry back 2008 net operating losses for three, four, or five years in order to obtain refunds of taxes paid for those years. Typically, a two-year carry-back rule applies. The election is only available for losses generated by businesses with average annual receipts of $15 million or less during the three-year period that precedes the year you record a net operating loss.

    * If your business uses the calendar year for tax purposes, you can make the extended carry-back election for a net operating loss that was generated in calendar year 2008. You have to make the election by April, 17, 2009, however. Consult your tax pro for details.

    * If your business uses a non-calendar tax year, you can make the election for either: (1) the tax year that ended in 2008 or (2) the tax year that began in 2008. Just keep in mind that you can make the election for one year or the other, but not both. Pick the one that does you the most good. Once again, depending on your tax year, you may have to take action by April 17, 2009. Talk to your tax adviser.

    One final point: While your business cannot create or increase a net operating loss with Section 179 deductions, it can do so with 50% first-year bonus depreciation deductions. Then, you may be able to carry back the net operating loss for up to five years (under the rules above) and collect major tax refunds. Talk to your pro about that possibility, as well.




    Interest Payments made by IRS on the NOL refund amount:
    NOLs generally are not entitled to any interest paid on the refunded amount.  There are two situations where interest is paid:
     

  • If the NOL processing is delayed so that your refund check is sent out later than what the IRS considers timely (usually three months or so) then the taxpayer is entitled to interest  which can be computed from the date your NOL refund request was received by IRS, or the date the refund check "should" have been mail to you, depending on how the IRS clerk understands the rules.
     
  • The IRS, unbelievably, has exceeding poor quality control over this area.  It has been reported anonymous to us by some taxpayers that the IRS has paid substantial interest, retroactively, from the due date of the original tax return from which the refund amount is coming from.

    Conscientious taxpayers inform the IRS of the possible error and occasionally the IRS understands and takes back the interest by voiding the original and then reissuing the check.  Other times the IRS appears to be clueless about the concept of when interest is supposed to be paid to a taxpayer.  [Caution - if sending back the original IRS check, many taxpayers find themselves in a deep dark IRS black hole and if takes months or years to get their money.  So an alternative to consider is to cash the IRS check and repay with a personal check]  [Caution #2 - cashing an IRS check for a greater amount than you are entitled to, potentially subjects the taxpayer to penalties and interest on the excess funds deposited.]

    Therefore when obtaining a NOL refund, sometimes substantial interest is included, and sometimes a small insignificant amount of interest is included and sometimes interest is not included at all.



    For information on similar problems when the IRS is charging interest, go to this link:
    http://traderstatus.com/IRSinterest.htm



"Retroactive" Mark-to-Market Elections

Individuals who want to use Mark-to-Market accounting for their trading generally must elect to do so on form 1040 or extension form 4868 no later than April 15th.  Having missed this date means that you must wait until next year.

But there are some "retroactive" M2M elections that can be useful if made with professional assistance:

  • Traders who have an entity newly established1 at the early part of the year in which the losses were incurred  may have elected M2M under the special rules for 1st time tax return filers without ever realizing it could benefit them now.
     
  • Traders who did not have a large capital loss last year, may not really need M2M in that year and therefore they can elect this year before April 15th or, if after April 15th they can form an appropriate new entity to trade through and make a special M2M election immediately upon formation.
     
  • Traders who lost trading during the year, but who's losses were merely "paper losses" because they were still holding the positions with significant paper losses in them on December 31 can make a special "retroactive election" to use those losses, if done before April 15 of the following year.
     
  • Similarly, traders who bought back securities within 30 days from when they sold them at significant losses in violation of the Wash Sales Rule, may make a special "retroactive election" on those losses, if done before April 15 of the following year.
     
  • After the April 15th deadline this Wash Sales Rule play coupled with a newly established entity may be helpful.
     
  • The Wash Sale Rule plays above can be "forced" by making sure you violate the rule by buying back the same securities within 30 days of a sale that resulted in significant tax losses.  Don't let the thirty days pass by without taking appropriate action.

1 If you own a newly formed entity such as an S-Corp, LLC, Partnership, Joint Venture, Joint Account and Certain Joint Undertakings with a Fellow Trader or Family Member and have never filed an income tax return together, or if other special circumstances apply, then you should contact us to discuss your options regarding a so-called "retroactive" M2M application.   (Please see clarification below)  When writing, please answer these questions which might indicate if you qualify for M2M even without a separate entity formed with the Secretary of the State.:

  • When, what date, was the brokerage account open?
  • When, what date, was the brokerage account funded?
  • What name(s) are on the account?
  • Are you married? and neither of you have filed for a tax return for the year in question?
  • What did you trade? securities/stock options?   futures/commodities?  forex?
  • What was the bottom line gain or loss for the year?

Clarification (2009):
Recently we have received many inquires about the "retroactive M2M elections."   Here is an attempt to clear up some misconceptions.

While there are many opportunities for taxpayers to use the M2M method of accounting for their active trading business, in almost all cases one critical requirement is that starting at the beginning, up front, the taxpayer (1) understood all about M2M and (2) must have wanted to use the mark-to-market method of accounting for their active trader business - right from the get-go.

Recently taxpayers have contact us with their "tale of woe," which unfortunately often does not meet the legal, statutory requirements to allow for a retroactive M2M election filing.  Such as:

  • my accountant / lawyer / financial planner did not tell me to file so-and-so with the IRS (reliance upon an expert's advice is no excuse to the IRS)
  • I just didn't know there was anything called "mark-to-market until today, after I've lost all my money (ignorance of the law is no excuse to the IRS)
  • the IRS told me such-and-such (any "advice" from some clerk at the IRS is not binding on the IRS, and very often it is wrong advice, and the IRS officially says that their verbal advice should not be relied upon)
  • I read about the guy who did a "private letter riling" and he got his M2M approved a year after the deadline (which, that court case cost him a small fortune to bring forward and the facts and circumstances in his case were extremely out of the ordinary)

While there are some exceptions to the above which can be found mentioned on this web site, they are far and few between, some are theoretical and some are untested in court and would cost a small fortune themselves to bring forward in the rare instances where all the facts and circumstances happened to "fit" the desire for M2M.

So let's get down to brass tacks.  What the typical trader might expect 99 out of 100 times:

  • the trader must have known there was an optional method of accounting called Section 475 mark-to-market (the sooner the better, but generally in no event later than just a couple months after the start of the retroactive start date)
  • the trader must have desired to use this Section 475 mark-to-market method for the trading (not to be confused with Section 1256 mark-to-market)
    • separately, the trader must have been clear with this desire and his choice to use (or to not use) the optional (elected/adopted) method of accounting for the trading in securities/stock options.
    • separately, the trader must have been clear with this desire and his choice to use (or to not use) the optional (elected/adopted) method of accounting for the trading in commodities/futures.
    • separately, the trader must have been clear with this desire and his choice to use (or to not use) the optional (elected) methods of accounting for the trading in FOREX.

  • Without the above firmly in place, then 99 out of 100 times there is no available M2M (retroactive or otherwise)
     
  • If a taxpayer who is an active, frequent trader can tell his tax advisor that  #1  he knew about M2M when he started the trading and  #2  that he wanted M2M for his trading business, then he is on 2nd or 3rd base already.
    • Conversely,  if a taxpayer says that he did not know about M2M until it was too late (after the appropriate deadline, which not surprisingly many taxpayers don't know what the deadline applicable to their situation is)   or  while he might have known about M2M but he wasn't sure if he really wanted to use it, until it was too late - well then in 80 out of 100 cases we find that this usually means that he has blown it.  That's not to say we can't salvage something out of it, particularly in the following year, but the situation can be less attractive than otherwise.
    • We also find many taxpayers, and many tax professionals for that matter, do not have a thorough understanding of each of the deadlines for electing M2M, yet they presume they missed the deadline and then they procrastinate with a feeling of hopelessness, sometimes delaying so long that they actually end up waiting to the point that they do blow it by not contacting a tax advisor familiar with trader taxation matters, as soon as they figured out they were in over their head.
    • And finally we find that some taxpayers who have initially blown a 1st year M2M election, can really salvage the situation very nicely using other appropriate, legal and legitimate, maneuvers described on this web site, if they contact us fast enough so that immediate corrective action can be taken before the various deadlines have passed by.

"Retroactive" Capital Loss Carryback Elections

A Carryback of IRS Code §1256 Losses to offset Prior IRS Code §1256 Gains, while normally elected with the timely filing of the tax return for the year that the loss was created, may nonetheless be carryied back retroactively in many cases.

This retoractive carryback election applies to Traders as well as to Investors for their IRS Code §1256 Commodities and Futures capital losses.  Generally this must be retroactively elected within the three year statute of limitations for either the loss year and/or the carryback year(s).

Normally the regular carryback election is made by checking Box D on form 6781 on a timely filed Income tax return.

Additional informational overview sites

Making the Mark-to-Market Election - Part I 
 

Making the Mark-to-Market Election - Part II 
The Section 481(a) Adjustment



 

   

 


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