NOL Penalty for late filing?

Question

In 2005 several friends started a business as a C-corporation. We got a loss about 30K and sent the return very late (we forgot it on time) when the IRS sent a letter requesting it in October 2006. In 2006 we had a net profit of 10K and we want to offset it against the NOL from 2005, but someone told us that it is not possible because we filed late and is the penalty for it. In 2007 we requested an extension and are trying to do the best that we can. The big question is: Can we offset our profit in 2006 against our loss in 2005? Or we will have to pay tax for the 2006 profit? Thank you for your help.

Answer 1

I don't think the NOL carryover has anything to do with late filing penalties. The penalties would affect the size of the check you have to write, but not how you determine this years taxes.

Answer 2

If you haven't paid the penalty, the IRS may offset the penalty against the NOL. If that is the case, then depending on whether all of the NOL was used to pay the penalty, you many not have a NOL Carry forward. If you paid the penalty, then this should have no effect on the NOL carryforward for your 2006 tax return.