Filing bankruptcy in Las Vegas can affect tax attributes, such as the “exclusion of gain” from income of the appreciation of a principal residence’s value after a sale. A similar tax attribute affected by bankruptcy is the “loss carry forward.”
If you own a small business and it suffers a loss (termed negative “net operating income”) in one year then you’re unlikely to pay any income tax on it. If your business has a positive net operating income in the two to seven years after the loss, you can apply the loss from the first year to the profit in a subsequent year. This reduces your tax liability because your business made less money.
In bankruptcy, holding on to a potential loss carryforward can have disadvantages in bankruptcy, and there are two reasons to use the maximum deductions allowed and amend your tax returns from prior years.
(1) Once you file bankruptcy, the Trustee will begin collecting any property you could not fit into an exemption, which can include your business, into the bankruptcy estate. Once the bankruptcy estate is created, the Trustee is tasked to manage it, including filing income tax returns just as you would. Unlike you, though, the Trustee is tasked with the duty of repaying as many of your creditors as possible, and he or she is paid a commission out of the proceeds. The loss carryforward is a source of income for the Trustee and the creditors. The Trustee will not hesitate to use take the loss carryforward this year even if it would be more beneficial for you and your business to wait.
(2) The amount of debt you discharge in bankruptcy affects your right to claim the loss carryforward deduction. In other words discharged debt reduces the loss you can deduct, so if the Trustee elects against taking the loss carryforward, you may lose it anyway.
Most people who file bankruptcy do not own their own businesses, and they mainly have credit card debt, mortgages, and auto loans. However, it’s important for small business owners to know the benefits of delaying bankruptcy to take advantage of certain tax attributes.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney at 702-880-5554 for a free initial consultation.