Generally, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward period). You can, however, choose not to carry back an NOL and carry it forward only. See Waiving the carryback period, later. The "NOL year" is the year in which the NOL occurred. You cannot deduct any part of the NOL remaining after the 20-year carryforward period.

Exceptions to 2-year carryback rule. Eligible losses and farming losses qualify for longer carryback periods.

Eligible loss. The carryback period for an eligible loss is 3 years. An eligible loss is any part of an NOL that:

1. Is from a casualty or theft, or
2. Is attributable to a Presidentially declared disaster for a qualified small business or a farming business (defined later).

Only farming losses that are attributable to Presidentially declared disasters in tax years that began after August 5, 1997, and before January 1, 1998, are considered "eligible losses" subject to a 3-year carryback period. Otherwise, all farming losses are considered "farming losses" subject to a 5-year carryback period.

Farming loss. The carryback period for a farming loss is 5 years. A farming loss is the smaller of:

1. The amount which would be the NOL for the tax year if only income and deductions attributable to farming businesses were taken into account, or
2. The NOL for the tax year.

You can choose to treat a farming loss as if it were not a farming loss. If you make this choice, the carryback period will be 2 years. To make this choice, attach a statement to your 2000 income tax return filed on or before the due date (including extensions) that you are choosing to treat any 2000 farming losses as if they were not farming losses under section 172(i)(3) of the Internal Revenue Code. Also, if you filed your return timely without making that choice, you may still make the choice by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach a statement to your amended return and write "Filed pursuant to section 301.9100-2" on the statement. File your amended return at the same address that you filed your original return. Once you make this choice, it is irrevocable.

Note. A waiver of the 5-year carryback for a farming loss would make the loss subject to the normal 2-year carryback rule. If, however, you choose not to carry back any of your farming loss, you need to attach a statement to your 2000 income tax return clearly identifying what carryback or carrybacks are being completely waived and stating that you are waiving them under sections 172(b)(3) and 172(i)(3) of the Internal Revenue Code.

Farming business. A farming business is a trade or business involving the cultivation of land, the raising or harvesting of any agricultural or horticultural commodity, operating a nursery or sod farm, the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. The raising, shearing, feeding, caring for, training, and management of animals is also considered a farming business.

A farming business does not include contract harvesting of an agricultural or horticultural commodity grown or raised by someone else. It also does not include a business in which you merely buy or sell plants or animals grown or raised by someone else.

Qualified small business. A qualified small business is a sole proprietorship or a partnership that has average annual gross receipts (reduced by returns and allowances) of $5 million or less during the 3-year period ending with the tax year of the NOL. If the business did not exist for this entire 3-year period, use the period the business was in existence.

Waiving the carryback period. You can choose not to carry back your NOL. If you make this choice, then you can use your NOL only in the 20-year carryforward period. (This choice means you also choose not to carry back any alternative tax NOL.)

To make this choice, attach a statement to your tax return filed by the due date (including extensions) for the NOL year or to an amended return for the NOL year filed within 6 months of the due date of your original return (excluding extensions). This statement must show that you are choosing to waive the carryback period under section 172(b)(3) of the Internal Revenue Code.

If you do not file this statement on time, you cannot waive the carryback period. If you filed your return timely but did not file the statement with it, you must file the statement with an amended return for the NOL year within 6 months of the due date of your original return (excluding extensions). Write "Filed pursuant to section 301.9100-2" on the statement.

Once you make this choice, you cannot change it because it is irrevocable. If you choose to waive the carryback period for more than one NOL, you must make a separate choice and attach a separate statement for each NOL year.

How to use the NOL. If you choose to carry back the NOL, you must first carry the entire NOL to the earliest carryback year. If your NOL is not used up, you can carry the rest to the next earliest carryback year, and so on.

If you do not use up the NOL in the 2 carryback years, carry forward what remains of it to the 20 tax years following the NOL year. Start by carrying it to the first tax year after the NOL year. If you do not use it up, carry the unused part to the next year. Continue to carry any unused part of the NOL until you complete the 20-year carryforward period.

Example 1. You started your business as a sole proprietor in 2000 and had a $42,000 NOL for the year. No part of the NOL qualifies for the 3-year or 5-year carryback period. You begin using your NOL in 1998, the second year before the NOL year, as shown in the following chart.

Year	Carryback/ Carryover	Unused Loss
1998	$42,000	$40,000
1999	40,000	37,000
2000 (NOL year)
2001	37,000	31,500
2002	31,500	22,500
2003	22,500	12,700
2004	12,700	4,000
2005	4,000	-0-

If your loss were larger, you could carry it forward until the year 2020. If you still had an unused 2000 carryforward after the year 2020, you could not deduct it.

Example 2. Assume the same facts as in Example 1, except that $4,000 of the NOL is attributable to a casualty loss and this loss qualifies for a 3-year carryback period. You begin using the $4,000 in 1997. As shown in the following chart, $3,000 of this NOL is used in 1997. The remaining $1,000 is carried to 1998 along with the $38,000 NOL that you must begin using in 1998.

Year	Carryback/ Carryover	Unused Loss
1997	$3,000	$1,000
1998	39,000	37,000
1999	37,000	34,000
2000 (NOL year)
2001	34,000	28,500
2002	28,500	19,500
2003	19,500	9,700
2004	9,700	1,000
2005	1,000	-0-

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