Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Small Business Deductions: Business Losses vs NOLs

<< Previous

How to Carry Back a Net Operating Loss

The rules:

First, go back two years prior to the NOL year.
- For example, if you have an NOL in 2011, you would go back to 2009.
- You recalculate your 2009 tax liability taking into account the amount of the NOL used to offset your income for 2009.
- Due to the NOL, you end up with a refund.
If any NOL remains after going back two years, then offset the remaining NOL against income in the first year prior to the NOL year.
- For example, if you had a $10,000 NOL in 2011 and only $6,000 was used up in 2009, you would carry the remaining $4,000 back to 2010.
- You recalculate your 2010 tax liability taking into account the amount of the NOL that was used to offset your income for 2010.
- You end up with a refund for 2010.
If the NOL is still not used up in the first year prior to the NOL year, then carry the remaining amount forward one year after the NOL year.
- For example, if only $2,000 of the $4,000 carried back to 2010 was used up, you would carry forward the remaining $2,000 to 2012.
- If the $2,000 NOL carried forward to 2012 is not used up, you carry forward any remaining NOL to 2013.
- You may continue carrying forward any unused NOL up to a maximum of 20 years. After that, any remaining NOL is lost.

Waiving the Two-Year Carryback Period for NOLs

If you choose to waive the two-year carryback period, then carry the NOL forward to the first year after the NOL year.

If the NOL is not used up in the first year after the NOL year, continue carrying it forward up to a maximum of 20 years. If after the 20-year maximum the NOL is not used up, the remaining NOL amount is lost.

If you think you will get a better tax break by carrying an NOL forward or if you're worried about triggering an audit by carrying the NOL back, then waive the carryback period and just carry it forward.

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.

Carryback Rule for an Eligible Loss

An eligible loss may be carried back three years.

An eligible loss is any part of an NOL that is from:

A casualty or theft,
A loss attributable to a Presidentially declared disaster for a qualified small business.
- A qualified small business for NOL purposes is a sole proprietorship or partnership that have average annual gross receipts (less returns and allowances) of $5 million or less during the 3-year period ending with the tax year of the NOL.

Farming Loss:

A farming loss may be carried back five years.

Recalculating Your Tax Liability

When you carryback an NOL it is used to reduce income in the carryback year.

Consequently, you must recalculate your tax liability for that year based on the revised amount of taxable income. Use Form 1045 to recompute the tax for the carryback year.

Bear in mind, certain deductions that you may have taken that are limited by adjusted gross income (AGI) may be affected as well.

For example, the medical expense deduction (7 1/2% floor) and miscellaneous itemized deductions (2% floor).

Business Losses and Net Operating Losses: Net Operating Loss and Marital Status

Next >>

Business Deductions

More Tax Topics

Quick Links

Hot Topics