My husband just got an email that’s one of those good news/bad news type of deals.  The writer had a fantastic 2008.  He made money hand over fist.  The problem was, he’d just come off a series of really bad years with lots of losses and had no money to pay his taxes.  Now what?

This is where it got confusing.  He said he had a Sole Proprietorship with a partner.  By definition, a Sole Prop means SOLE - just one person.  So, what he really had was a General Partnership.  If you have a partner and no business structure, you default to GP.  That meant he would pay fed and state income tax plus self-employment tax of 15.3% on his share of the income.  

It’s too late to go back and set up a business structure for 2008.  

But, wait, he had losses for years, right?  So that meant he would have Net Operating Loss (NOL) carry-forwards.  Those losses can be used against his income this year.  THEN the tax would be calculated on any income that is still left.

There’s a problem, though.  They were losses so he never bothered to file a tax return. 

We’re now left with three alternatives (1) go back and file amended returns for the years that are still open & create that NOL carry forward, (2) if possible, make this the first year of operation and all the losses would be considered start-up costs to be amortized and create expenses or (3) bite the bullet and just start this year with a lot of income and tax.

Either way, he’s looking at a lot more cost then if he’d filed his loss returns in the years that he had them.  

Losses can be cash in your pocket, but only if you properly account for them.