If your deductions for the year are more than your income for the
year, you have a potential NOL.
There are rules that limit what you can deduct when figuring an
NOL. In general, you cannot deduct the following items.
- Personal exemptions.
- Capital losses in excess of capital gains.
- The section 1202 exclusion of 50% of the gain from the sale
or exchange of qualified small business stock.
- Nonbusiness deductions in excess of nonbusiness
income.
- Net operating loss deduction.
Schedule A (Form 1045).
Use Schedule A (Form 1045) to figure an NOL. This discussion
explains Schedule A and includes an illustrated example.
First, complete lines 1-3 of Schedule A, using amounts from your
return. If line 3 is a negative amount, you have a net loss and a
potential NOL.
Next, complete the rest of Schedule A to figure your NOL. Adjust
the amount on line 3 for deductions that are allowed when figuring
your taxable income, but not when figuring an NOL. The following
discussions explain these adjustments.
Adjustment for exemptions (line 4).
You cannot deduct your personal exemption or your exemptions for
dependents. An estate or trust cannot deduct its exemption amount.
Your adjustment is the total amount you deducted for exemptions.
Adjustment for nonbusiness deductions (line 12).
You can deduct your nonbusiness deductions (line 9) only up to the
total of:
- Your nonbusiness capital gains that are more than your
nonbusiness capital losses (not including any section 1202 exclusion
shown as a loss on Schedule D of Form 1040) (line 8), and
- Your nonbusiness income other than capital gains (line
10).
Your adjustment is your nonbusiness deductions that are more
than the total of (1) and (2).
Nonbusiness deductions (line 9).
Enter on line 9 as your nonbusiness deductions only those that are
not related to your trade or business or your employment. For example,
enter your deductions for alimony, contributions to an IRA or other
self-employed retirement plan, and your itemized deductions, except
for casualty and theft losses, and any employee business expenses. If
you do not itemize deductions, include your standard deduction.
Do not include your deduction for one-half of your
self-employment tax or your deduction for self-employed health
insurance. Treat these items as business deductions.
Also, do not include your deductions for expenses that are ordinary
and necessary in carrying on your trade or business or your
employment, or related deductions for the following items.
- If you itemize your deductions, employee business expenses,
such as, union dues, uniforms, tools, education expenses, and travel
and transportation expenses.
- If you itemized your deductions, casualty and theft losses,
even if they involve nonbusiness property.
- Your share of a business loss from a partnership or an S
corporation.
- Moving expenses.
- State income tax on business profits.
- Interest and litigation expenses on state and federal income
taxes related to your business income.
- Payments by a federal employee to buy back sick leave used
in an earlier year.
- Loss on property you rent out.
- Loss on the sale or exchange of business real estate or
depreciable business property.
- Loss on the sale of accounts receivable (if you use an
accrual method of accounting).
- Loss on the sale or exchange of stock in a small business
corporation or a small business investment company, if treated as
ordinary loss.
- Unrecovered investment in a pension or annuity claimed on a
decedent's final return.
Nonbusiness income (line 10).
Enter on line 10 only income that is not related to your trade or
business or your employment. For example, enter your annuity income,
dividends, and interest on investments. Also, include your share of
nonbusiness income from partnerships and S corporations.
Do not include the income you receive from your trade or
business or your employment. This includes salaries and wages,
self-employment income, and your share of business income from
partnerships and S corporations. Also, do not include rental income or
ordinary gain from the sale or other disposition of business real
estate or depreciable business property.
Adjustment for section 1202 exclusion (line 20).
Enter on line 20 any gain you excluded on the sale or exchange of
qualified small business stock.
Adjustments for capital losses (lines 24 and 25).
You can deduct your nonbusiness capital losses (line 5) only up to
the amount of your nonbusiness capital gains (line 6), without regard
to any section 1202 exclusion. If your nonbusiness capital losses are
more than your nonbusiness capital gains, you cannot deduct the
excess.
You can deduct your business capital losses (line 14) only up to
the total of:
- Your nonbusiness capital gains that are more than the total
of your nonbusiness capital losses and excess nonbusiness deductions
(line 13), and
- Your total business capital gains (line 15), without regard
to any section 1202 exclusion.
The adjustment on line 24 is your capital loss deduction (line 22)
that is more than your net capital loss without regard to any section
1202 exclusion (line 21).
Your adjustment on line 25 is your nondeductible capital losses
(line 18) that are more than the nondeductible net capital loss on
your return (line 23), without regard to any section 1202 exclusion
claimed on Schedule D. (You had a nondeductible net capital loss if
your net capital loss was more than your capital loss deduction.)
Adjustment for NOL deduction (line 26).
You cannot deduct any NOL carryovers or carrybacks from other
years. Your adjustment is the total amount of your NOL deduction for
losses from other years.
Illustrated Schedule A (Form 1045)
The following example illustrates how to figure an NOL. It includes
filled in pages 1 and 2 of Form 1040 and Schedule A (Form 1045).
Example.
Glenn Johnson is in the retail record business. He is single and
has the following income and deductions on his Form 1040 for 2000.
| INCOME |
| Wages from part-time job |
$1,225 |
| Interest on savings |
425 |
| Net long-term capital gain on sale of real
estate used in business |
2,000 |
| Glenn's total income |
$3,650 |
| DEDUCTIONS |
| Net loss from business (gross income of $67,000
minus expenses of $72,000) |
$5,000 |
| Net short-term capital loss
on sale of stock |
1,000 |
| Standard deduction |
4,400 |
| Personal exemption |
2,800 |
| Glenn's total deductions |
$13,200 |
Glenn's deductions exceed his income by $9,550 ($13,200 -
$3,650). However, to figure whether he has an NOL, he must modify
certain deductions. He uses Schedule A (Form 1045) to figure his NOL.
See the illustrated Schedule A (Form 1045) included later.
Glenn cannot deduct the following items on Schedule A (Form 1045).
| Nonbusiness net short-term capital loss |
$1,000 |
| Nonbusiness deductions
(standard deduction, $4,400) minus
nonbusiness income (interest, $425) |
3,975 |
| Personal exemption |
2,800 |
| Total adjustments to net loss |
$7,775 |
Therefore, Glenn's NOL for 2000 is figured as follows:
| Glenn's total 2000 income |
$3,650 |
| Less: |
| Glenn's original 2000 total
deductions |
$13,200 |
| Less: |
| Glenn's total adjustments to net
loss (above) |
- 7,775 |
- 5,425 |
| Glenn's NOL for 2000 |
$1,775 |
When these items are eliminated, Glenn's net loss is reduced
to $1,775 ($9,550 - $7,775).
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