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Roth Conversion Planning for a Small Business Owner or Farmer


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Continuing with the discussion about Roth IRA conversions – there is an opportunity for the small business owner or farmer that may be quite useful. Many small business owners and farmers have large Net Operating Loss (NOL) carryovers from previous years, due to the fact that NOL can only be deducted to the extent of the individuals’ Adjusted Gross Income. Beginning with tax year 2018, excess NOL can be carried over indefinitely, but can only offset 80% of the taxable income for the year of the return.

Prior to the Tax Cuts and Jobs Act (2018) NOL carryforward was limited to 20 years, but could offset 100% of the taxable income. In addition, not germain to this article, TCJA also eliminated the 2-year carryback NOL for all taxpayers except for farmers. Any NOL prior to 2018 uses the old rules.

For the small business owner or farmer who has retired and closed his business, a large NOL can be difficult to take advantage of – especially if his income requirement is small in relation to the carried forward NOL. If the small business owner or farmer has an IRA, there is a unique opportunity for a Roth conversion, up to an amount equal to the carried over NOL, thereby converting the funds to a tax-free account with no tax owed.

The reason that this is important is because carried over NOL disappears when the taxpayer dies. If the NOL is large enough that normal income (or Required Minimum Distributions) doesn’t utilize the NOL completely, then this opportunity can help to create tax-free income for the taxpayer in the future.

Note: estates and trusts can also have NOL, but this provision is not pertinent to estates and trusts.

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