Business owners entering bankruptcy almost always have more complex cases than simple private bankruptcies, especially because the business owners themselves are filing on their own behalves as well. The differences in how the tax code applies to small businesses as opposed to individuals don’t help either.
One quirk business owners need to be aware of in particular is called a “loss carryfoward.” What is this?
Let’s say you own a small business, and it loses money in one year. (This is referred to as “negative net operating income” in business lingo.) Obviously, it won’t pay any income tax that year. However, if the business posts profits in two of the seven subsequent years, the business can apply the loss from the first year to the income gained in a profiting year. The losses from a previous year are “carried forward” to the subsequent year, and your business benefits because as far as the IRS is concerned, your business made less money than it actually did, and so it pays less in income taxes. So far so good.
In a business bankruptcy, though, holding on to a loss carryforward is often a not a good idea. The reason is that the bankruptcy Trustee collects all the business’ assets into the bankruptcy estate and essentially assumes financial control over it, meaning he or she files the business’ income tax returns. The Trustee, though, does not have the business’ long-term financial future in mind. The goal is to free up as much income as possible and transfer it to the business’ creditors. Moreover, the Trustee receives a commission on the amount of money the bankruptcy estate transfers to the creditors, so if the business has a poor year before and then a solid one subsequently, the Trustee won’t hesitate to use the business’ loss carryforward. It’s easier money than liquidating the business’ physical capital.
The loss carryforward is one of a few unique ways the tax code allows the bankruptcy Trustee to find money in the bankruptcy estate, and the easiest way to keep it is to use it yourself by amending a previous tax return, if possible. If you own a business and it’s running into financial difficulties (and you may be yourself), quirks like the loss carryforward are things you want your bankruptcy attorney to knowledgeable of. It’s one situation where experience counts.
For more questions about businesses in bankruptcy, bankruptcy and tax attributes, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Bankruptcy Automatic Stay Bruce Weiner for a free initial consultation.