Calculating Your Net Operating Loss (Page Three)

When, where and how to calculate this monster

The Net Operating Loss, as applied to individuals and small businesses, is one of the most complicated features of the U.S. Tax Code, perhaps second only to the calculation of recaptured depreciation. The IRS does not explain it clearly. In fact, I have found no resource which explains it clearly, that is why I created this article. This is Page Three, of a multi-page article which will investigate the Net Operating Loss calculation.

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This article should be cited as:
"Net Operating Loss Carryforward : Calculating Your Net Operating Loss (Page Three)" by Will Johnson, wjhonson@aol.com at knol.google.com Creative Commons Attribution 3.0 License

 

Some online resources related to this topic

Click here to get your current TurboTax 2010 Software

Form 1045 Schedule A Line-by-line


Form 1045 Schedule A Line 1 AGI less Deductions

Line 1 is pretty clear, you enter the amount from line 41 of your Form 1040, or line 38 of your Form 1040NR, but then of course, being the I.R.S. they have to throw in the confusion of "minus the amount from Form  8914..."  This is the form for people claiming that they housed people displaced by Hurricane Katrina.  I think we're safe to skip this.  If you did house someone displaced by Hurricane Katrina, stop reading this, go to a tax attorney.


Form 1045 Schedule A Line 2-3 Non-Business Capital Gain or Loss

Line 2 here is called "Non-business capital losses before limitation".  Let's break it down.  If you have a business that generates capital gains or losses, you would not include that here.  That wouldn't apply to most people.  Capital losses are generally reported on Schedule D, and for the vast majority of taxpayers, they are simply your gains or losses in the stock market.

Why do they say here "before limitation"?  This is because, when you file Schedule D, your net gains are not limited, but if you have losses, you will find these are limited to whatever gains you had.  On Schedule D, if you have more capital losses after applying them against your capital gains, then you can only take an additional hit of $3,000 or $1,500 if married filing separately.  This additional hit would go to your Form 1040 Line 13.

However, here on Form 1045 Schedule A Line 2, what they want is for you to temporarily ignore that $3,000/$1,500 limitation and simply put in what your full Net Loss was from your Schedule D.  Of course, if you have no Net Loss, then you simply enter 0 here.

Line 3 is similar in that Net Gains can have an exclusion.  If you had taken the 1202 Exclusion, which again is rare and deals with the disposition of Small Business Stock, then you temporarily ignore that Exclusion and enter here the full amount of your Net Gains.  Small Business Stock is not the sort that most of us are familiar with, which is traded on an exchange.  Rather Small Business Stock is privately-held by a few persons, and typically exchanged between them as well.  It is unlikely that you've encountered this sort of stock, so you are safe to put here your full Net Gains, or if none, then enter zero here.  As mentioned above, since your Net Gains have no limitation you can get this number either from your Form 1040 Line 13, or from your Schedule D.  The two numbers should be the same if you had Net Gains.


Form 1045 Schedule A Line 4-5 Net Non-Business Capital Gain or Loss

For line 4, you subtract Line 3 from Line 2, if the amount is greater than zero, you enter it on Line 4, otherwise on Line 4 you enter zero.  So we could call Line 4 your "Actual Realized Net Non-business Capital Loss".  That is, this is the Net Capital Non-business Loss you actually felt (realized) in your bank account, wallet or head, instead of the loss the I.R.S. normally allows you, which is limited.

For line 5, you instead subtract Line 2 from Line 3, if the amount is greater than zero, you enter it here on Line 5, otherwise you enter zero.  So we could call Line 5 your "Actual Realized Net Non-business Capital Gain."  That is, this is the Net Capital Non-business Gain you actually felt (realized) in your bank account, wallet or head, instead of the gain the I.R.S. allowed you to say you had, which has exclusions.


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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.



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Comments

How to Maximize NOL

So if I understand this correctly, the effect of line 9 on form 1045 is to isolate non business income/deductions and to disallow non business deductions that exceed non business income in the NOL result. If that is the case, then in a year when your interest income and dividends (the most common components of non business income) does not exceed your IRA, HSA, and itemized deductions (common components of non business deductions), then you will be effectively disallowed a portion of those deductions. So, it may not be advantageous to contribution to an HSA or an IRA as there won't be a tax benefit. As an alternative, rather than contribute to a traditional IRA, it would be better to contribute to a Roth IRA if the non business deductions exceed the non business income by a good percentage of the amount you contribute to your IRA. Is that correct?

Rob Garneau - 14 Oct 2009

Great. Thanks. Very informative article!

Rob Garneau - 14 Oct 2009

You're right. In a year in which you already have a zero or negative net income, you're not going to realize any *further* tax advantage except for some items that can be carried forward. For example losses on investment real estate you still own, can be carried forward to next year.

Also itemized deductions (Schedule A) should be minimized (if possible) in years when your income is going to be negative as they don't give you the benefit that you'd like. And any business payments (Schedule C) or investment property payments (Schedule E) that can be postponed to the following year should be.

Will Johnson - 14 Oct 2009