40.20 How To Report a Net Operating Loss

You compute your net operating loss deduction on Schedule A of Form 1045 (40.21). You start with adjusted gross income and personal deductions shown on your tax return. As these figures include items not allowed for net operating loss purposes, you follow the line-by-line steps of Schedule A (Form 1045) to eliminate them. That is, you reduce the loss by the nonallowed items such as deductions for personal exemptions, net capital loss, and nonbusiness deductions exceeding nonbusiness income. The Example at the end of this section illustrates the steps in the schedule.

Adjustment for nonbusiness deductions.

Nonbusiness deductions that exceed nonbusiness income may not be included in a net operating loss deduction. Nonbusiness deductions include deductions for IRA and Keogh plans and itemized deductions such as charitable contributions, interest expense, state taxes, and medical expenses. Do not include in this non-allowed group deductible casualty and theft losses, which for net operating loss purposes are treated as business losses. If you do not claim itemized deductions in the year of the loss, you must treat the standard deduction as a nonbusiness deduction.

Nonbusiness income is income that is not from a trade or business—such as dividends, interest, and annuity income. The excess of nonbusiness capital gains over nonbusiness capital losses is also treated as part of nonbusiness income that offsets nonbusiness deductions.

At-risk loss limitations.

The loss used to figure your net operating loss deduction is subject to the at-risk rules (10.17). If part of your investment is in nonrecourse loans or is otherwise not at risk, you must compute your deductible loss on Form 6198, which you attach to Form 1040. The deductible loss from Form 6198 is reflected in the income and deduction figures you enter on the Form 1045 schedule to compute your net operating loss deduction.

Reporting NOLs.

NOLs carried forward from prior years are reported on Line 21 of Form 1040 as “other income.” The NOL is entered as a negative amount. When amending prior returns to account for an NOL carryback, the NOL is entered as a negative amount.