Producer question: Do I have to pay taxes if I didn't make any profit this year? Can I do anything with my taxes relative to those losses?

Patrick's response: For the 1999 tax year, you may find that farm expenses exceeded farm and other income. The federal tax law allows you to carry losses from one year back to prior years. The purpose is to compensate for taxes that you previously paid or carried forward in order to offset tax liabilities in future years. Thus, pork producers with losses should not just file their 1999 tax returns and ignore their carry-back and carry-forward options.

When farm expenses, including depreciation, exceed farm income on the Schedule F form, a farm loss exists. For sole proprietorships, partnerships and S corporations, the farm loss flows through to individual owners. For C corporations, losses remain at the corporate level and are not part of this discussion.

A farm loss is generally not the same as a net operating loss (NOL). If the farm loss is greater than other income, including sales of cull breeding stock and non-farm income, the adjusted gross income in the loss year must be recomputed as discussed within this text. If the recomputed adjusted gross income is greater than the loss, you will have no loss to shift to other tax years. However, if the loss is greater than the recomputed adjusted gross income, you can carry the NOL to another tax year.

As farmers you have these options: You can carry the NOL back two years, carry a farm NOL back five years, or carry the NOL forward up to 20 years.

If you use the carry-back period, the NOL may trigger a total or partial refund of the income taxes you paid in the carry-back year. If carrying back the NOL will not result in a tax refund, you can elect to use the 20-year carry-forward period. This can reduce taxes in future years. In all of these cases, the NOL reduces taxable income but not earnings for self-employment taxes.

The best strategy for the carry-back vs. carry-forward decision is generally the one that provides the greatest tax savings.

Determining the NOL deduction and the amount that you can deduct in another year requires several adjustments. Business income, including non-farm wages, less business losses is adjusted in two ways.

1. Non-business deductions, standard or itemized, are deductible for computing an NOL only to the extent of non-business income (interest, dividends, pensions, capital gains from non-business investments and so on).

2. Capital losses are deductible for computing the NOL only to the extent of capital gains.

Once you make those adjustments, you then have the NOL that you can carry into other tax years.

If you elect to use the two-year carry-back, you must apply the 1999 NOL available for carry-back to offset 1997's income. If you choose the five-year farm NOL carry-back, 1999's NOL would offset income from 1994. You also will have to modify that year's income to determine how much of the loss is absorbed.

The capital-loss deduction is limited to the capital gain amounts included in income. Deductions based on or limited by a percentage of adjusted gross income (for example: medical expenses) must be recomputed.

If the NOL is not fully absorbed by the modified taxable income of the first carry-back year that you selected, then you can carry the leftover forward to the next eligible year (1998 for the two-year carry-back and 1995 for the five-year carry-back). You will need to make similar income modifications to determine how much of the NOL can be absorbed in that year.

If you decide to forgo the carry-back option and chose instead to carry the 1999 NOL forward, you must attach a statement to your filed 1999 tax return. You would make this decision in situations where carrying the loss back would result in little or no tax refund.

In future years, the income adjustments discussed here will be needed to determine the amount of the NOL absorbed. If you elect to forgo the carry-back option on the 1999 return, you must carry-back the NOL before you can carry any remaining NOL forward.

The calculations associated with computing an NOL and the amount absorbed in a carry-forward/carry-back year can be complex and time consuming. The best use of an NOL depends on your circumstances and may require considerable analysis of the alternatives. Competent tax advice, analysis and planning is essential to put your operating loss to work before filing your 1999 tax return.

George Patrick is an agricultural economist at Purdue University in West Lafayette, Ind.