If your deductions for the year are more than your income for the year, you may have an NOL.
There are rules that limit what you can deduct when figuring an NOL. In general, the following items are not allowed when figuring an NOL.
- Any deduction for 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.
- The domestic production activities deduction.
Use Schedule A (Form 1045) to figure an NOL. The following discussion explains Schedule A and includes an illustrated example.
First, complete Schedule A, line 1, using amounts from your return. If line 1 is a negative amount, you may have an NOL.
Next, complete the rest of Schedule A to figure your NOL.taxmap/pubs/p536-001.htm#en_us_publink100096432
Enter on line 6 deductions that are not connected to your trade or business or your employment. Examples of deductions not related to your trade or business are:
- Alimony paid,
- Deductions for contributions to an IRA or a self-employed retirement plan,
- Health savings account deduction,
- Archer MSA deduction,
- The additional exemption amount for providing housing to a Midwestern displaced individual from Form 8914, line 2,
- Most itemized deductions (except for casualty and theft losses, state income tax on business profits, and any employee business expenses), and
- The standard deduction (except the amount of any net disaster loss from Form 4684, line 18a).
Do not include on line 6 the deduction for personal exemptions for you, your spouse, or your dependents.
Do not enter business deductions on line 6. These are deductions that are connected to your trade or business. They include the following.
- State income tax on business profits.
- Moving expenses.
- Educator expenses.
- The deduction of one-half of your self-employment tax or your deduction for self-employed health insurance.
- Domestic production activities deduction.
- Rental losses.
- Loss on the sale or exchange of business real estate or depreciable property.
- Your share of a business loss from a partnership or S corporation.
- Ordinary loss on the sale or exchange of stock in a small business corporation or a small business investment company.
- If you itemize your deductions, casualty and theft losses (even if they involve nonbusiness property) and employee business expenses (such as union dues, uniforms, tools, education expenses, and travel and transportation expenses).
- The amount of any net disaster loss from Form 4684, line 18a, you included in your standard deduction.
- Loss on the sale of accounts receivable (if you use an accrual method of accounting).
- Interest and litigation expenses on state and federal income taxes related to your business.
- Unrecovered investment in a pension or annuity claimed on a decedent's final return.
- Payment by a federal employee to buy back sick leave used in an earlier year.
Enter on line 7 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 on line 7 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. taxmap/pubs/p536-001.htm#en_us_publink100096434
Enter on line 17 any gain you excluded under Internal Revenue Code section 1202 on the sale or exchange of qualified small business stock. taxmap/pubs/p536-001.htm#en_us_publink100096435
The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses.taxmap/pubs/p536-001.htm#en_us_publink100096436
You can deduct your nonbusiness capital losses (line 2) only up to the amount of your nonbusiness capital gains without regard to any section 1202 exclusion (line 3). If your nonbusiness capital losses are more than your nonbusiness capital gains without regard to any section 1202 exclusion, you cannot deduct the excess. taxmap/pubs/p536-001.htm#en_us_publink100096437
You can deduct your business capital losses (line 11) 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 10), and
- Your total business capital gains without regard to any section 1202 exclusion (line 12).
You cannot take the domestic production activities deduction when figuring your NOL. Enter on line 23 any domestic production activities deduction claimed on your return.taxmap/pubs/p536-001.htm#en_us_publink100096439
You cannot deduct any NOL carryovers or carrybacks from other years. Enter the total amount of your NOL deduction for losses from other years. taxmap/pubs/p536-001.htm#en_us_publink100096440
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).taxmap/pubs/p536-001.htm#en_us_publink100096441
Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2008.
|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|
|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
|Glenn's total deductions||$14,950|
Glenn's deductions exceed his income by $11,300 ($14,950 − $3,650). However, to figure whether he has an NOL, certain deductions are not allowed. He uses Schedule A (Form 1045) to figure his NOL. See the illustrated Schedule A (Form 1045), later.
The following items are not allowed on Schedule A (Form 1045).
|Nonbusiness net short-term capital loss||$1,000|
(standard deduction, $5,450) minus
nonbusiness income (interest, $425)
|Deduction for personal exemption||3,500|
|Total adjustments to net loss||$9,525|
| || |
Therefore, Glenn's NOL for 2008 is figured as follows:
|Glenn's total 2008 income||$3,650|
|Less:|| || |
|Glenn's original 2008 total deductions||$14,950|| |
|Reduced by the disallowed items||− 9,525||− 5,425|
|Glenn's NOL for 2008||$1,775|