Carry a net income loss from current FY (under owner) to new FY (new ownership) as tax shield?

searcher profile

October 14, 2021

by a searcher from Stanford University in San Diego, CA, USA

If a seller shows a negative net income for current FY (due to taking excessive cash out of the business prior to selling), would I be able to use that loss as a tax shield for next FY when business under my ownership? Assuming would be for a stock sale. Transaction would take place on Day 1 of new FY.

Updating with more info: Target company is a C-Corp and owner is paying himself a bonus to take cash out. This is coming from cash on the balance sheet, not retained earnings. Before handing over the business, he will take almost all cash out of the business, which would create a NOL. The loss would be for FY 2021 and I would take over FY###-###-#### This would be a stock sale.

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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
The answer is not straightforward depending on the entity type (c-corp, llc) and when the loss was generated (pre/post###-###-#### and sale type (stock/asset). For c-corp with pre-2018 NOLs, this is the best case and you should be able to take advantage of the NOLs. For c-corp with post 2017 NOLs selling as a stock sale, see IRS section 382 for the limitations on the use of the NOLs post transaction. For asset sale, the seller will have a tax benefit on the NOL (but the buyer can then take accelerated depreciation on any assets). For stock sale of LLC, I believe any losses would have already been 'distributed' to members prior to your ownership.

I am curious from your post how taking cash out of the business has generated a loss for the business. I wouldn't have thought that would affect net income.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I am not a CPA nor a tax advisor. But,
Why is seller paying FICA and OI on bonus rather than taking money out as dividends? There has to be a reason beyond being a generous to you.
One possibility where he comes out ahead and you don't have NOL.
Seller has outside losses to offset bonus income and he is capped out at FICA. (ask CPA if he can offset is possible)
He carries back C Corp. losses and gets back prior taxes of C Corp. And, you may not have NOL. (Ask CPA if he can carry-back NOL in C Corp.)
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