ew businesses can take anywhere from several months to a few years to turn a profit. The seasonal economy of many industries in Alaska can add additional financial uncertainty for small businesses. With all that uncertainty and financial risk, small business owners often try to do as much by themselves as they can, including marketing and tax filings.

As a self-employed writer and occasional communications consultant, I’ve seen this pattern firsthand. But I’ve also learned that extending a “DIY” mentality to taxes can hold unexpected perils, especially when it comes to handling business losses. “People… make decisions that they don’t understand the long-term impact of,” says Bryan Fick, a CPA at Younger and Company, “so then they get into undesirable tax situations.”

Authors have peculiar tax situations, by the nature of the job. From 2018 to 2019, I used savings to fund international research for a book I hadn’t yet sold but hoped to write. In both years, I took financial losses, and I trusted my longstanding online tax service to track all the details that mattered. Not until 2022, when I finally got the first book advance, did I think about whether my earlier losses could help reduce my tax bill. It took a few calls with my DIY tax service’s “experts,” but eventually we reported a carryforward loss, and I thought all was good.

A few years later, however, when facing a challenging tax bill, I realized that my carryforward losses hadn’t been set up right at all. Worse, it might be too late to fix things. Here’s how to learn from—and hopefully avoid—some of the mistakes I made.

A carryforward loss, as the term implies, is a financial deficit that has implications for more than just the present year. Most CPAs contacted about this article referred to it as a net operating loss. I mostly use “carryforward” in this article to help convey the potential multi-year impact of such a loss.

According to current Internal Revenue Service (IRS) instructions for Form 172 “Net Operating Losses for Individuals, Estates, and Trusts,” a net operating loss occurs when “your deductions for the year are more than your income for the year” and, furthermore, those deductions occur from certain qualifying activities. CPA Rajeev Modi, president of Tax One accounting office in Anchorage, says there are multiple ways to have a net operating loss. When that happens, he says one can’t always apply the full loss to the current tax year.

In some cases, the IRS applies excess business loss limitations (as detailed in the Form 172 instructions on “Excess Business Loss”). Carrying a loss forward allows a business to reduce taxes on future profits by essentially spreading the profit over the multiple years it took to achieve.

An activity that doesn’t turn a profit for years might just be a hobby, and the IRS needs to be able to tell the difference. The Hobby Loss Rule helps the IRS distinguish between for-fun expenses and business losses. If the activity is run like a business, with a separate bank account and punch-clock hours, the IRS will likely treat it as eligible to write off losses. And if the activity records a profit in three out of five consecutive years, the IRS presumes it is a business, not a hobby.

Stuart Lyle, an enrolled agent with Lyle Tax Services, says carrying a loss forward doesn’t count as an additional year of loss; it just offsets part of the profit.

Consider the following scenario. Small Business A loses $20,000 in 2022 and $10,000 in 2023, then earns a profit of $10,000 in 2024 and a profit of $30,000 in 2025. Viewed through the tax-year lens, this business has two years of losses, for which the business owes no tax, and two years of profit, for which the business does owe taxes.

Or consider a second scenario. Small Business K loses $30,000 in 2022 and then earns $5,000 in 2023, $10,000 in 2024, and $25,000 in 2025.

How much total profit is taxable over those four years? Business owners who don’t understand carryforward losses and do their taxes themselves might pay taxes on $40,000 in total taxable income over that four-year period. But given their respective losses, both Business A and Business K actually have net profits over four years of $10,000. A properly applied carryforward loss helps the business owner’s taxes better reflect this. But DIY tax services don’t always handle such situations correctly.

“I always tell people [those services might be] fine if you’re a W-2 type employee,” Fick says, but with any kind of small business, “there’s a lot of things that get missed.”

In general, Fick finds that people either err on the side of being too conservative or too aggressive. “The top two things I see that cost people money” by not using a professional are either “missed deductions” or “the exposure that you open yourself up to if you got audited,” he says. In both cases, a professional could help a business owner take appropriate deductions.

If a small business owner suddenly notices that a prior year’s return didn’t correctly handle a carryforward loss, Fick says it’s important to get professional help as soon as possible. “If you create a problem by year one, by year five you have a real mess on your hands,” he says. “The quicker you catch things and get it dealt with, the more options you have.”

The IRS website says, “Generally, to claim a refund, you must file an amended return within three years after the date you filed your original return or two years after the date you paid the tax, whichever is later. If you filed early, count from the April tax deadline.”

However, the same IRS page says, “Special rules apply to file for refunds when you have net operating losses” and other tax situations. Modi and Fick were both unsure about attempting to amend a return older than three years. Lyle says he’s sometimes filed an amendment past the deadline and the IRS has accepted it.

Business owners rethinking a DIY tax preparation strategy have various options for help. The IRS authorizes multiple kinds of entities to prepare taxes. CPAs, enrolled agents, and attorneys all have “unlimited representation rights,” which means they “may represent their clients on any matters including audits, payment/collection issues, and appeals.” Alaska licenses both CPAs and attorneys, but enrolled agents like Lyle get their licensure through the IRS. Both CPAs and enrolled agents also have continuing education requirements.

Modi says low-income small business owners might also be able to get help through the Volunteer Income Tax Assistance program, an IRS service for free basic returns coordinated by local nonprofits such as United Way. Business networking groups, such as chambers of commerce, can also be a valuable resource that connects different kinds of professionals with each other, he says.

Both Modi and Fick thought most CPAs would prefer to handle all of a customer’s filing, rather than offering consultation on a return the customer handled in DIY fashion. “It’s difficult for us, from a liability perspective, to give advice when we don’t see the whole picture,” Fick says. If a firm like Tax One were to offer consultation rather than full filing services, Modi thinks this would be most likely during the quietest months, when CPAs or enrolled agents might otherwise work on continuing education more than taxes.

For small business owners considering that their losses might be so perpetual that the IRS would classify the activity as a hobby, both Lyle and Modi stress the importance of running things like a business.

Several practices help show that the filer intends to make a profit and approaches the operation like a business, not a hobby. These include having a separate bank account and credit card for the business, rather than intermingling business transactions in otherwise-personal accounts.

Lyle says tracking one’s hours, pursuing continuing education, and having a business plan also help. The latter might include a plan to increase pricing or other documented strategies to turn the business from losses to profits. And even if one operates as a sole proprietor, he recommends getting an employer identification number from the IRS.

Whether the taxpayer is an author doing research, a horse breeder waiting for foals to mature, or an innovator in the startup phase, thinking ahead can benefit the nascent business financially by taking advantage of tax rules meant to spur innovation.