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Updated for 2011

Small Business Deductions: Business Losses vs NOLs

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Form 1045, Schedule A

If you have a negative balance on Form 1040, line 41 (2008), a net operating loss MAY exist.

Your next step is to complete Schedule A of Form 1045 (instructions) to determine if you actually have a net operating loss and, if so, its amount.

Example of net operating loss computation.

Why a Separate Computation on Form 1045, Schedule A is Required to Figure a NOL

Certain deductions that you're allowed to claim on Form 1040 are not allowed in figuring a net operating loss. Consequently, to determine whether you have a net operating loss and its amount, you must perform a separate computation on Schedule A of Form 1045.

For example, a nonbusiness capital loss, such as a loss on stock you own personally, is deductible in figuring adjusted gross income but is not allowed in computing a net operating loss.

For example, assume you have a nonbusiness capital loss of $1,000. Also assume Line line 41 of Form 1040 shows a negative balance of $5,000 which takes into account the $1,000 capital loss.

To compute your net operating loss you would complete Schedule A of Form 1045.

On Line 1 of Schedule A, Form 1045, you would enter the $5,000 negative amount from Line 41, Form 1040.

Then, Schedule A, Form 1045 will have you add back the $1,000 capital loss to the negative $5,000.

The nonbusiness capital loss may not be used to increase your net operating loss so it is disallowed and excluded from the $5,000 negative amount that appears on Line 41 of Form 1040.

By adding back the $1,000 capital loss to the negative $5,000 reported on line 41 of Form 1040, you would end up with a negative amount of $4,000 (-$5,000 plus $1,000.

You then complete the rest of Schedule A, Form 1045, taking into account other items that may apply to your situation. The result will be the amount of your net operating loss.

Form 1045:

The place for adding back disallowed items, like the $1,000 nonbusiness capital loss, is Schedule A, Form 1045.

Deducting a Net Operating Loss

An NOL is used to reduce income in prior and/or future years' income.

An NOL must first be carried back two years. If an NOL is not used up in the prior two years, you can carry the remaining NOL forward, up to twenty years. If an NOL is not used up after carrying it forward 20 years, any remaining NOL is lost.

You can waive the two-year carryback period.

To waive the carryback period attach a statement to the original Form 1040 and file it on or before the due date, including extensions, for the NOL year (the year the NOL first occurred). Indicate that you want to waive the carryback period.

If an NOL is used to reduce a prior year's income a refund will result.

Your refund will be the difference between the original tax paid in the carryback year and the recalculated lower tax resulting after subtracting the NOL from that year's income.

If an NOL is used to reduce a future year's income the tax liability for that year will be reduced.

If you carry more than one NOL to the same tax year, your NOL deduction is the total of all carrybacks and carryovers to that year.

If your NOL is more than your taxable income in the year you carry it to, the excess amount is carried over to the next year.

Business Losses and Net Operating Losses: How to Carry Back a Net Operating Loss; Waiving the Two-Year Carryback Period for NOLs; Carryback and Carryforward Periods; Carryback Rule for an Eligible Loss; Recalculating Your Tax Liability

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