40.21 How To Carry Back Your Net Operating Loss

When you carry back the loss, you recompute your tax for the earlier year on Form 1045. After recomputing the tax on Form 1045, your refund is the difference between the tax originally paid and the lower tax figured after taking the net operating loss deduction. See the instructions to Form 1045 and also IRS Publication 536 for details of the recomputation calculation.

Planning Reminder

Advantage of Relinquishing the Carryback

You will generally make the election to relinquish the carryback if you expect greater tax savings by carrying the loss forward. You might also make the election if you are concerned you might be audited for earlier years if you carry back a loss for a refund. You make the election by attaching a statement to this effect to your return for the year of the loss, which must be filed by the due date plus extensions. The IRS refuses to allow a late election and received court approval for its position.

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Use Form 1045 as a “quick refund” claim. The IRS will usually allow or reject your claim within 90 days from the time you file Form 1045. Do not attach Form 1045 to your 2012 Form 1040. File Form 1045 separately, together with a copy of your return. Generally, Form 1045 may be filed within 12 months after the end of the NOL year. If the IRS allows the refund, it may still determine later that the refund was excessive and assess additional tax.

Although using Form 1045 is the quickest way to obtain the refund, you may instead file an amended return on Form 1040X to claim the refund. You have three years after the due date (including extensions) of your 2012 tax return to file Form 1040X.