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previous page Previous Page: Publication 536 - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
next page Next Page: Publication 536 - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts - When To Use an NOL
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p536-001.htm#en_us_publink100096430

How To Figure an NOL(p2)


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previous topic occurrence Net Operating Loss next topic occurrence

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.
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Schedule A (Form 1045).(p2)


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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.
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Nonbusiness deductions (line 6).(p2)
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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:
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.
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Nonbusiness income (line 7).(p3)
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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.
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Adjustment for section 1202 exclusion (line 17).(p3)


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Enter on line 17 any gain you excluded under Internal Revenue Code section 1202 on the sale or exchange of qualified small business stock.
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Adjustments for capital losses (lines 19–22).(p3)


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The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses.
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Nonbusiness capital losses.(p3)
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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.
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Business capital losses.(p3)
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You can deduct your business capital losses (line 11) only up to the total of:
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Domestic production activities deduction (line 23).(p3)


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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.
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NOLs from other years (line 24).(p3)


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You cannot deduct any NOL carryovers or carrybacks from other years. Enter the total amount of your NOL deduction for losses from other years.
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Illustrated Schedule A (Form 1045)(p3)


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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).
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Example.(p3)

Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2008.
INCOME 
Wages from part-time job$1,225
Interest on savings425
Net long-term capital gain on sale of real estate used in business2,000
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 deduction5,450
Personal exemption3,500
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
Nonbusiness deductions
(standard deduction, $5,450) minus
nonbusiness income (interest, $425)
5,025
Deduction for personal exemption3,500
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
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Form 1040, page 1 Text DescriptionForm 1040, page 1  


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Form 1040, page 2 Text DescriptionForm 1040, page 2  
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Form 1045, page 2 Text DescriptionForm 1045, page 2  


Deposit
Glenn has a $5,000 small business loss, which is more than his NOL of $1,775. For 2008, Glenn can carry back his NOL 2 years under the general 2-year carryback rule, or he can choose a 3, 4, or 5-year carryback period for his entire NOL under the rule for eligible small business losses.
previous pagePrevious Page: Publication 536 - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
next pageNext Page: Publication 536 - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts - When To Use an NOL
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication