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

by a searcher from Stanford University

2 years ago

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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intermediary from The University of Chicago - Booth School of Business

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.)

2 years ago | like reply | 0 likes

investor from University of Kansas

Net operating losses can be carried, just be careful that you're trying to offset active income with active losses. We run into trouble when trying to offset active income with passive losses from real estate or capital losses.

2 years ago | like reply | 1 like

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