Business owners who claim deductions that total more than their income in a given year may record a net operating loss (NOL). Net operating losses may result from high startup costs associated with launching a new business, large first-year depreciation deductions, or significant business losses for existing businesses. An NOL can be carried backwards (for a maximum of five years) or forward (for a maximum of 20 years).
For taxpayers with unused NOL being carried forward for tax purposes, a Roth IRA conversion may be an attractive strategy since the income generated from the conversion could be offset by the NOL. In essence, one could convert tax-deferred retirement assets to a Roth without any tax consequences for that particular year. For example, let’s assume that a small business had a NOL of $30,000 in it’s first year of starting up. If that business owner had a decent chunk in a old traditional IRA account or 401k, they could use that to offset the loss. Now they have a nice chunk of tax free savings for retirement. Complex tax rules govern reporting an NOL, so consult with a tax professional for guidance.
