How to Turn Your ISP's
Business Losses into Tax Benefits

Tough-times may require ISP owners and operators to get tough-minded when it comes to tax-time. Learn how to make the most out of a bad situation by utilizing existing tax laws to your advantage.

by Mark E. Battersby [January 24, 2001]

Fortunately, many types of losses encountered by the average ISP operator can be eased or reduced by simply taking advantage of current tax regulations. Under present tax rules, any loss sustained during the taxable year or a loss not covered or "made good" by insurance—can be claimed as a tax deduction.

Would a refund on taxes paid by your formerly profitable ISP business from year's past help ease the pain of operating losses you report this tax year? What if last year's business losses could offset next year's profits and reduce your tax bill for years to come?

Allowable takeaways
A net operation loss—or NOL—is the total excess of allowable deductions over gross income, with required adjustments. In other words—if all of your ISPs expense deductions exceed your ISPs income shown—on either your tax return or your ISPs tax return—you may report a NOL.

That is if, after making some slight adjustments to that loss such as ignoring your dependency amounts, the loss remains and if it is a loss from a trade or business, your could claim the net operating loss for your ISP business.

Remember, a substantiated NOL is a loss that can be carried back two years, often producing refunds of taxes paid in those years. If two years ago your ISP business was not profitable enough to negate this year's NOL, the potential deduction may be carried forward for up to 20 years—until it is used up.

Inauspicious obligations
Business bad debt, regardless of whether it arose from an operator's loans to his or her ISP business or loans to others—so long as they are business related—can be deducted to the extent of their worthlessness.

Note that business bad debt that is worthless can occur anytime the debt becomes partly or totally worthless. However, a non-business bad debt can only be deducted when it becomes completely worthless.

Unfortunately, business bad debt deductions are not available to shareholders who have advanced money to a corporation as a contribution to capital, or to creditors who hold a debt that is confirmed by a bond, note or other evidence of indebtedness.

Casualty losses, at least if they have are the result of a legitimately declared "disaster" can be utilized to recoup taxes paid in the previous tax year. In essence, a casualty loss resulting from a declared disaster may be claimed as a tax deduction in the year preceding the tax year in which the disaster occurred.

Purloined privation
The tax rules clearly state that theft losses are actually "sustained" in the year when the ISP operator discovers the loss. In other words, a business loss due to theft or embezzlement is not normally deducted in the tax year in which the theft actually occured—unless the theft revelation also happens to occur during the same year in which the your discover the loss.

There is one condition; if in the year of discovery a reasonable possibility of reimbursement for the theft loss exists, the deduction cannot be taken until reimbursement is either made or ruled out as a probability. Remember, the basic rule states that in order for losses to be deductible, there must be a "closed transaction."

Forsaken capital
Finally, there are those losses that every ISP operator can control. Quite simply, a loss is allowed for the abandonment of an asset. According to tax guidelines, all the operator must do is "manifest an intent to abandon the asset and make some affirmative act of abandonment." The resulting loss is generally reported on an adjusted basis, or book value of the abandoned property.

If a depreciable business asset or income-producing asset loses its usefulness and is subsequently abandoned, the loss is equal to its adjusted basis. Obviously, an abandonment loss must be distinguished from anticipated obsolescence of capital equipment.

If a non-depreciable asset is abandoned following a sudden termination of its usefulness, a loss is also allowed in an amount equal to its adjusted basis. This type of loss applies to the abandonment of a business, as well as the abandonment of intangible assets, such as contracts for services.

For example, if your ISP abandoned DSL services this year and terminated contracts for those services, it could be considered a non-depreciable asset impacting this year's tax benefits. You should seek professional counsel if you think your ISP business could benefit for abandoning a non-depreciable asset.

Sheltered relief
In today's economy, many ISP owners are experiencing more than their share of losses. Fortunately, whether those losses result from the economy, Mother Nature or other factors, current tax rules can help.

There are tax rules are in place that could help your recoup business losses for your ISP operation—whether it's a basic tax deduction for bad debt losses, an adjusted loss for abandoned equipment, or business conditions that produce a net operating loss.

Are you prepared to take all the tax benefits you rightfully deserve from reporting your businesses' losses this year?

— End