Section 195 of the Code allows a deduction of up to five thousand dollars for business start up expenses. Expenses greater than that amount can be amortized over fifteen years. The expenditure for which the deduction is claimed must be one that would be allowable to an existing business under Section 162 and cannot be a capital expense. Sole Proprietorship. The NOL is determined on the proprietor’s gross income from all sources as reported on the Form 1040, not just on the income or loss from the business reported on Schedule C. In general, an NOL is computed in the same way taxable income is computed: deductions are subtracted from gross income, and if deductions exceed gross income there is a net operating loss. However, there are rules that limit what deductions may be taken in computing an NOL. In general, these rules do not permit a deduction for net capital losses, nonbusiness losses, nonbusiness deductions, personal exemptions and NOL carryovers or carrybacks from previous years. Some deductions also must be modified in taking the NOL. Internal Revenue Service regulations and those of the Minnesota Department of Revenue determine the years to which the NOL is carried, and the order in which NOLs are deducted. Partnership. A partnership is not allowed to take an NOL deduction. All losses to the partnership for tax purposes are passed through to the partners each year. The partners may use their separate shares of the partnership’s loss to compute their individual NOL. The rules for sole proprietors discussed above apply. C Corporation. For federal tax purposes, a C corporation determines and deducts an NOL in much the same way an individual does. The same carryback and carryover periods apply and the same rules apply when two or more NOLs are carried to the same year. A corporation’s NOL differs from an individual’s NOL in three ways. First, a corporation is allowed to take different deductions in figuring an NOL. Second, a corporation must make different modifications to its taxable income in the carryback or carry forward year when figuring how much of the NOL may be deducted. Third, Minnesota does not permit carryback of an NOL. (An NOL may be carried forward 15 years.) Because the corporation is a separate taxable entity, the NOL is deducted by the corporation and is not passed through to shareholders. Minnesota’s tax laws must be followed in taking the NOL deduction for Minnesota income tax purposes. S Corporation. The S corporation, like a partnership, is not allowed to take an NOL deduction. If the S corporation incurs a loss for the year, it is passed through to shareholders in proportion to their shareholdings. The shareholders of the S corporation may use their share of the corporation’s loss to compute their individual NOL. Estimated Tax Payments Sole Proprietorship. The sole proprietor generally will be required to make federal and Minnesota estimated tax payments if his or her income tax and (for federal purposes) self-employment tax will exceed taxes paid through withholding and credits by $500 or more ($1,000 for federal individual income tax purposes). The tax is determined on income from all sources, including income from the business. A penalty may be imposed on underpaid estimates. Sole proprietors who receive salaries and wages can avoid having to pay estimated tax by asking their employer(s) to withhold more tax from their earnings. A new Form W-4 would need to be filed with their employer. A special line on Form W-4 is where the sole proprietor would enter the additional amount they want their employer to withhold. Review IRS Estimated Taxes .
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