If your NOL is more than your taxable income for the year to which you carry it (figured before deducting the NOL), you may have an NOL carryover. You must make certain modifications to your taxable income to determine how much NOL you will use up in that year and how much you can carry over to the next tax year. Your carryover is the excess of your NOL deduction over your modified taxable income for the carryback or carryforward year. If your NOL deduction includes more than one NOL, apply the NOLs against your modified taxable income in the same order in which you incurred them, starting with the earliest. taxmap/pubs/p536-004.htm#en_us_publink100096487
Your modified taxable income is your taxable income figured with the following changes.
- You cannot claim an NOL deduction for the NOL carryover you are figuring or for any later NOL.
- You cannot claim a deduction for capital losses in excess of your capital gains. Also, you must increase your taxable income by the amount of any section 1202 exclusion claimed on Schedule D (Form 1040).
- You cannot claim the domestic production activities deduction.
- You cannot claim a deduction for your exemptions for yourself, your spouse, or dependents.
- You must figure any item affected by the amount of your adjusted gross income after making the changes in (1), (2), and (3), above, and certain other changes to your adjusted gross income that result from (1), (2), and (3). This includes income and deduction items used to figure adjusted gross income (for example, IRA deductions), as well as certain itemized deductions. To figure a charitable contribution deduction, do not include deductions for NOL carrybacks in the change in (1) but do include deductions for NOL carryforwards from tax years before the NOL year.
Your taxable income as modified cannot be less than zero. taxmap/pubs/p536-004.htm#en_us_publink100096488
You can use Schedule B (Form 1045) to figure your modified taxable income for carryback years and your carryover from each of those years. Do not use Schedule B for a carryforward year. If your 2008 return includes an NOL deduction from an NOL year before 2008 that reduced your taxable income to zero (to less than zero, if an estate or trust), see NOL Carryover From 2008 to 2009
The following example illustrates how to figure an NOL carryover from a carryback year. It includes a filled-in Schedule B (Form 1045).taxmap/pubs/p536-004.htm#en_us_publink100096490
Ida Brown runs a small clothing shop. In 2008, she has an NOL of $36,000 that she carries back to 2006. (Ida does not choose a 3, 4, or 5-year carryback period for her 2008 NOL under the rule for ESB losses.) She has no other carrybacks or carryovers to 2006.
Ida's adjusted gross income in 2006 was $35,000, consisting of her salary of $36,000 minus a $1,000 capital loss deduction. She is single and claimed only one personal exemption of $3,300. During that year, she gave $1,450 in charitable contributions. Her medical expenses were $3,000. She also deducted $1,650 in taxes and $3,125 in home mortgage interest.
Her deduction for charitable contributions was not limited because her contributions, $1,450, were less than 50% of her adjusted gross income. The deduction for medical expenses was limited to expenses over 7.5% of adjusted gross income (.075 × $35,000 = $2,625; $3,000 − $2,625 = $375). The deductions for taxes and home mortgage interest were not subject to any limits. She was able to claim $6,600 ($1,450 + $375 + $1,650 + $3,125) in itemized deductions for 2006. She had no other deductions in 2006. Her taxable income for the year was $25,100.
Ida's $36,000 carryback will reduce her 2006 taxable income to zero. She completes the column for the second preceding tax year ended 12/31/06 of Schedule B (Form 1045) to figure how much of her NOL she uses up in 2006 and how much she can carry over to 2007. See the illustrated Schedule B shown on pages 14 and 15. Ida does not complete the column for the first preceding tax year ended 12/31/07 because the $6,525 carryover to 2007 is completely used up that year. (See the information for line 9 below.)
Line 1. Ida enters $36,000, her 2008 net operating loss, on line 1.
Line 2. She enters $25,100, her 2006 taxable income, on line 2.
Line 3. Ida enters her net capital loss deduction of $1,000 on line 3.
Lines 4 and 5. Ida had no section 1202 exclusion or domestic production activities deduction in 2006. She enters zero on lines 4 and 5.
Line 6. Although Ida's entry on line 3 modifies her adjusted gross income, that does not affect any other items included in her adjusted gross income. Ida enters zero on line 6.
Line 7. Ida had itemized deductions and entered $1,000 on line 3, so she completes lines 11 through 38 to figure her adjustment to itemized deductions. On line 7, she enters the total adjustment from line 38.
Line 11. Ida's adjusted gross income for 2006 was $35,000.
Line 12. She adds lines 3 through 6 and enters $1,000 on line 12. (This is her net capital loss deduction added back, which modifies her adjusted gross income.)
Line 13. Her modified adjusted gross income for 2006 is now $36,000.
Line 14. On her 2006 tax return, she deducted $375 as medical expenses.
Line 15. Her actual medical expenses were $3,000.
Line 16. She multiplies her modified adjusted gross income, $36,000, by .075. She enters $2,700 on line 16.
Line 17. The difference between her actual medical expenses and the amount she is allowed to deduct is $300.
Line 18. The difference between her medical deduction and her modified medical deduction is $75. She enters this on line 18.
Lines 19 through 21. Ida had no deduction for qualified mortgage insurance premiums in 2006. She skips lines 19 and 20 and enters zero on line 21.
Line 22. She enters her modified adjusted gross income of $36,000 on line 22.
Line 23. She had no other carrybacks to 2006 and enters zero on line 23.
Line 24. Her modified adjusted gross income remains $36,000.
Line 25. Her actual contributions for 2006 were $1,450, which she enters on line 25.
Line 26. She now refigures her charitable contributions based on her modified adjusted gross income. Her contributions are well below the 50% limit, so she enters $1,450 on line 26.
Line 27. The difference is zero.
Lines 28 through 37. Ida had no casualty losses or deductions for miscellaneous items in 2006. She skips lines 28 through 31 and lines 33 through 36. Ida enters zero on lines 32 and 37.
Line 38. She combines lines 18, 21, 27, 32, and 37 and enters $75 on line 38. She carries this figure to line 7.
Line 8. Ida enters the deduction for her personal exemption of $3,300 for 2006.
Line 9. After combining lines 2 through 8, Ida's modified taxable income is $29,475.
Ida figures her carryover to 2007 by subtracting her modified taxable income (line 9) from her NOL deduction (line 1). She enters the $6,525 carryover on line 10. She also enters the $6,525 as her NOL deduction for 2007 on Form 1045, page 1, line 10, in the "After carryback" column under the column for the first preceding tax year ended 12/31/07. (For an illustrated example of page 1 of Form 1045, see Illustrated Form 1045
under How To Claim an NOL Deduction
, earlier.) taxmap/pubs/p536-004.htm#en_us_publink100096491