If you have paid income taxes during the last three years, but then lost your job or retired, you may be able to get all of that tax money back -- in cash -- to finance your business start- up. Most business losses in excess of the current year's income (whether proprietorship, share of partnership, or Subchapter S corporation) carry back for three years -- not just forward into future years.
Tax refunds could be a reason to start your own business immediately, even if you are still looking for another job. You open a business which has first year losses, a fairly normal situation. Immediately after the end of the first year (which might be only a partial year if you opened the business late in the year) you file a 1040X to carry those losses back to the third prior year, thus raising cash to finance the business.
For a salaried person going into his own business, timing this can be a very valuable part of tax planning -- you may want to cram all the deductions you can into that first tax year of business in order to get the largest possible refund from an earlier year for financing your business today. And this financing is free money -- it is taxes you already paid and that will be lost forever once the three year time limit goes by.
You can use the amount of deduction that you can't use in the current year, and get a refund of the taxes you paid in the earlier years, up to the point that the entire loss credit is used up.
You can also do this more than once. For example, you have a current year business loss which gets you a refund of all of the third prior year's taxes and part of the second prior year's taxes. If next year you continue to have a loss, the second prior year is now the third prior year, so it hasn't been wasted. It is not too late to get back the rest of the taxes you paid that year. In other words, two refunds for the same year! (It is not impossible to have three refunds for the same year -- if first filed a 1040X in the current year for deductions you overlooked, then in two future years had a business loss that you could carry back.)
Business losses can be carried back without using an amended return on Form 1040X, if you use Form 1045 to claim the refund within 12 months after the end of the year in which the net operating loss or credit occurred. (Corporations can do the same thing on a Form 1139, to get a refund on earlier corporate taxes.) If it is after the deadline to use a Form 1045, you haven't lost out. The same carryback loss can be used to claim a refund up to three years back, but it must then be done by using Form 1040X to amend the year for which the refund is being taken.
It is very easy to file an amended federal tax return, and normally you may do so within three years of filing the original return (or two years of paying the tax).
Anything on your return can be amended with 1040X. So if you see items that might have made a difference in your last three year's tax returns, get out your copies and recalculate the return as if you had originally deducted those items. Then transfer the results to Form 1040X.
It's your money -- don't let fear of the IRS keep you from claiming it. And that cash in your pocket now is more valuable than the possibility of crediting the loss towards some future year's income.
And if you don't have a tax refund available to you, consider looking for a partner who does. Perhaps a parent has recently retired, and by becoming a partner in your business can obtain a refund of tax money that would otherwise be lost. They gain a piece of the business, and cash is raised that wouldn't have been available to either partner otherwise.
About the Author Adam Starchild is the author of over a dozen books, and hundreds of articles, on business, finance, and taxation. The above article is reprinted with permission from his book How to Save on Your Taxes Without Cheating.
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