I'm a newer tax preparer, so any input would be greatly appreciated.
Has anyone ever converted accumulated NOLs to PALs on a current return instead of
amending prior-year returns?
My client is a Form 1120 filer with only rental income. They’ve been reporting the activity as
an active trade or business and have generated NOLs for the past seven years. Now, they’re
planning to sell some of the properties at a loss. Since only 80% of the NOL can be used,
there will still be tax due due to depreciation recapture.
I’ve heard that some tax professionals have reclassified NOLs as PALs when taking over a
new client from a previous preparer who treated the activity as non-passive when it should
have been passive.
In this case, the client has not been actively participating in the rental activity—possibly for
the past five years—so I believe the income should have been treated as passive. I ran the
numbers, and if the activity had been reported as passive from the beginning, the
accumulated PAL would be about equal to the current accumulated NOL.
Has anyone successfully made this type of change without triggering audit issues?