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Taxmap/pubs/p536-001.htm#TXMP7865bc82 How To Figure an NOL

NOL

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.

• Any deduction for personal exemptions.
• Capital losses in excess of capital gains.
• The section 1202 exclusion of 50% of the gain from the sale or exchange of qualified small business stock.
• Nonbusiness deductions in excess of nonbusiness income.
• Net operating loss deduction.

Taxmap/pubs/p536-001.htm#TXMP56277fdf Schedule A (Form 1045).

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.

Taxmap/pubs/p536-001.htm#TXMP1578cd30 Nonbusiness deductions (line 6).

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:

• Alimony,
• Contributions to an IRA or other self-employed retirement plan,
• Itemized deductions (except for casualty and theft losses and any employee business expenses), and
• The standard deduction (if you do not itemize your deductions).

Do not enter business deductions on line 6. These are deductions that are connected to your trade or business. They include the following.

• State income tax on business profits.
• Moving expenses.
• The deduction of one-half of your self-employment tax or your deduction for self-employed health insurance.
• Rental losses.
• Loss on the sale or exchange of business real estate or depreciable property.
• Your share of a business loss from a partnership or S corporation.
• Ordinary loss on the sale or exchange of stock in a small business corporation or a small business investment company.
• If you itemize your deductions, casualty and theft losses (even if they involve nonbusiness property) and employee business expenses (such as union dues, uniforms, tools, education expenses, and travel and transportation expenses).
• Loss on the sale of accounts receivable (if you use an accrual method of accounting).
• Interest and litigation expenses on state and federal income taxes related to your business.
• Unrecovered investment in a pension or annuity claimed on a decedent's final return.
• Payment by a federal employee to buy back sick leave used in an earlier year.

Taxmap/pubs/p536-001.htm#TXMP50533f6b Nonbusiness income (line 7).

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.

Taxmap/pubs/p536-001.htm#TXMP134fd47e Adjustment for section 1202 exclusion (line 17).

Enter on line 17 any gain you excluded under section 1202 on the sale or exchange of qualified small business stock.

Taxmap/pubs/p536-001.htm#TXMP5a9e13d7 Adjustments for capital losses (lines 19–22).

The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses.

Taxmap/pubs/p536-001.htm#TXMP01d827e6 Nonbusiness capital losses.

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.

Taxmap/pubs/p536-001.htm#TXMP6cc4f727 Business capital losses.

You can deduct your business capital losses (line 11) only up to the total of:

• Your nonbusiness capital gains that are more than the total of your nonbusiness capital losses and excess nonbusiness deductions (line 10), and
• Your total business capital gains without regard to any section 1202 exclusion (line 12).

Taxmap/pubs/p536-001.htm#TXMP521d6fcb NOLs from other years (line 23).

You cannot deduct any NOL carryovers or carrybacks from other years. Enter the total amount of your NOL deduction for losses from other years.

Taxmap/pubs/p536-001.htm#TXMP283039ef 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).

Taxmap/pubs/p536-001.htm#TXMP0b6c0231
Example.

Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2004.

INCOME
Wages from part-time job	$1,225
Interest on savings	425
Net long-term capital gain on sale of real estate used in business	2,000
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 deduction	4,850
Personal exemption	3,100
Glenn's total deductions	$13,950

Taxmap/pubs/p536-001.htm#TXMP6691b4f5

Form 1040, page 1  

Taxmap/pubs/p536-001.htm#TXMP64d70aac

Form 1040, page 2  

Taxmap/pubs/p536-001.htm#TXMP6e4927a6

Form 1045, page 2  

Glenn's deductions exceed his income by $10,300 ($13,950 − $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, $4,850) minus nonbusiness income (interest, $425)	4,425
Deduction for personal exemption	3,100
Total adjustments to net loss	$8,525

Therefore, Glenn's NOL for 2004 is figured as follows:

Glenn's total 2004 income		$3,650
Less:
Glenn's original 2004 total deductions	$13,950
Reduced by the disallowed items	- 8,525	- 5,425
Glenn's NOL for 2004		$1,775

Previous Page:  Publication 536 - Net Operating Losses - Net Operating Losses (NOLs) for Individuals, Estates, and Trusts Next Page:  Publication 536 - Net Operating Losses - When To Use an NOL Use     to find additional instances of index items.