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IRS.gov Website
Current Year Tax Map
Publication 536
taxmap/pubs/p536-001.htm#en_us_publink1000177329

How To Figure an NOL(p2)

rule
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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Form 1045, Schedule A.(p2)

rule
Use Form 1045, Schedule A, to figure an NOL. The following discussion explains Schedule A and includes an illustrated example.
First, complete Form 1045, 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 Form 1045, Schedule A, to figure your NOL.
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Nonbusiness deductions (line 6).(p2)
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)
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, unemployment compensation included in your gross 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)

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

rule
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)
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)
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)

rule
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)

rule
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 Form 1045, Schedule A(p3)

rule
The following example illustrates how to figure an NOL. It includes filled-in pages 1 and 2 of Form 1040 and Form 1045, Schedule A.
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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 2012. See the illustrated Form 1040, later.
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 deduction5,950
Personal exemption3,800
Glenn's total deductions$15,750
Glenn's deductions exceed his income by $12,100 ($15,750 − $3,650). However, to figure whether he has an NOL, certain deductions are not allowed. He uses Form 1045, Schedule A, to figure his NOL. See the illustrated Form 1045, Schedule A, later.
The following items are not allowed on Form 1045, Schedule A.
Nonbusiness net short-term capital loss$1,000
Nonbusiness deductions
(standard deduction, $5,950) minus
nonbusiness income (interest, $425)
5,525
Deduction for personal exemption3,800
Total adjustments to net loss$10,325
  
Therefore, Glenn's NOL for 2012 is figured as follows:
Glenn's total 2012 income$3,650
Less:  
Glenn's original 2012 total deductions$15,750 
Reduced by the disallowed items− 10,325− 5,425
Glenn's NOL for 2012$1,775
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