How To Figure an NOLIf your deductions for the year are more than your income for the year, you have a potential NOL. There are rules that limit what you can deduct when figuring an NOL. In general, you cannot deduct the following items.
Schedule A (Form 1045). Use Schedule A (Form 1045) to figure an NOL. This discussion explains Schedule A and includes an illustrated example. First, complete lines 1-3 of Schedule A, using amounts from your return. If line 3 is a negative amount, you have a potential NOL. Next, complete the rest of Schedule A to figure your NOL. Adjust the amount on line 3 for deductions that are allowed when figuring your taxable income but not allowed when figuring an NOL. The following discussions explain these adjustments. Adjustment for exemptions (line 4). You cannot deduct your personal exemption or your exemptions for dependents. An estate or trust cannot deduct its exemption amount. Your adjustment is the total amount you deducted for exemptions. Adjustment for nonbusiness deductions (line 12). The amount of your nonbusiness deductions (line 9) is limited to the total of:
Nonbusiness deductions (line 9). Enter on line 9 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 enter business deductions on line 9. These are deductions that are connected to your trade or business. They include the following.
Nonbusiness income (line 10). Enter on line 10 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 10 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. Adjustment for section 1202 exclusion (line 20). Enter on line 20 any gain you excluded under section 1202 on the sale or exchange of qualified small business stock. Adjustments for capital losses (lines 24 and 25). The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses. Nonbusiness capital losses. You can deduct your nonbusiness capital losses (line 5) only up to the amount of your nonbusiness capital gains (line 6), without regard to any section 1202 exclusion. If your nonbusiness capital losses are more than your nonbusiness capital gains, you cannot deduct the excess. Business capital losses. You can deduct your business capital losses (line 14) only up to the total of:
Line 24. The adjustment on line 24 is your capital loss deduction (line 22) that is more than your net capital loss, without regard to any section 1202 exclusion (line 21). Line 25. The adjustment on line 25 is your nondeductible capital losses (line 18) that are more than the nondeductible net capital loss (line 23) on your return, without regard to any section 1202 exclusion claimed on Schedule D. (You had a nondeductible net capital loss if your net capital loss was more than your capital loss deduction. Adjustment for NOL deduction (line 26). You cannot deduct any NOL carryovers or carrybacks from other years. Your adjustment is the total amount of your NOL deduction for losses from other years. 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). Example. Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2001.
Glenn's deductions exceed his income by $9,800 ($13,450 - $3,650). However, to figure whether he has an NOL, he must adjust certain deductions. He uses Schedule A (Form 1045) to figure his NOL. See the illustrated Schedule A (Form 1045) included later. Glenn cannot deduct the following items on Schedule A (Form 1045).
Therefore, Glenn's NOL for 2001 is figured as follows:
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