Calculating Your Net Operating Loss (Page Five)

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 Five, 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 Five)" by Will Johnson, at 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 7 Non-Business Income

Line 7 is another one of those calculations, that only the I.R.S. could figure out how to make incomprehensible.  So we need another table, where BR means "business related" (or other) and NBR means "not business related".  Since our goal here is simply to add up the NBR income, we're gonna fudge a bit on what is BR exactly, since it's not material to our current purpose.  Maybe the I.R.S. should just call this "not NOL-related income".

Form 1040
 Line Item Description BR NBR
 7 Wages, salaries, tips
 8 Taxable interest
 9 Ordinary dividends
 10 Taxable refunds, etc
 11 Alimony received
 12 Business income or loss
 13 Capital gain or loss
 14 Other gains or loss
 15  IRA distributions
 16  Pensions and annuities
 17 Rental real estate, etc
 18 Farm income or loss
 19 Unemployment compensation
 20 Social security benefits
 21 Other income

So you add up your amounts that are in the NBR column above, and enter that amount here on Line 7.

Form 1045 Schedule A Line 8

Remember that we've already decided to name Line 5 as "Actual Realized Net Non-business Capital Gain".  Now since Line 7 is "Non-business income other than capital gains", then when we are instructed to "add lines 5 and 7" can you guess what this new Line 8 should be called?

That's right.  Line 8 should be called "Actual Net Non-business Capital Gain and Gross Income".  In other words, this number, Line 8, represents what you actually made in all of your non-business activity without regard to I.R.S. exclusions and limitations on what you can report.  It is the more real number if you will. But before deductions, which we will get to next, and without yet taking into account any non-business capital loss. (Do you ever get the feeling you're being led by the nose through a labyrinth?)

The remainder of this article, which covers the rest of the form, through line 25, may be purchased for five dollars at this Google Checkout link.  Upon payment, you will immediately receive an automatic email reply, with the instructions for exactly where to go and what to do, to read the remainder of this article.

Or you may call me through Keen

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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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Excellent! $5 Really Well Spent. Followup Questions not covered... please advise!

Have struggled with understanding if can carryforward one or more NOL's each year, for past 4 yrs every October! (As have become more forgetful... aging "gracefully", then forget to follow-up until next tax season!) Your article does a fantastic job of explaining how to determine if have an NOL or not, stepping through the complexities of form 1045. Well done! However, did not explain what happens next, if multiple NOL's in a row, or if no taxes due for other reasons, as to what is required when filing one's schedule C & 1040. So, requesting clarification of how to apply the NOL in current or future years, specific to a string of years where no taxes are due due to offsetting deductions, while still accumulating business NOL's those years. OK... here's the scenario. NOL in each of 4 recent yrs ('07-'10). 24 yr old business had been successful previously. Carryforward investment losses from '08 stock crash, classic bad timing of buying high, then selling near the '08 lows. (Then, shorting in '09 & '10 after initial run-ups, only to see things inexplicably go quite higher....) Dividend income covered portion of family expenses these yrs., balance of expenses paid from savings of years when business did well. Also, principal repayment of large loan had made to childhood friend provided cashflow without tax obligation. (May take a few more yrs until principal all paid back, after which becomes taxable income.) Personal deductions (substantial medical, property taxes, some donations, etc.) and family exemptions offset dividend and misc. income these years. Did not file 1045, as seemed overwhelmingly complex, especially at last minute. (Learned this yr. Turbotax can opt to waive carryback of 2010 NOL, so elected this option.) Completing taxes today and tomorrow, hopefully! Was fully audited in '08 to confirm no taxes due, as had family expenses and deductions, yet little income that yr. to offset. Apparently computers flagged to confirm no missing income and determine how expenses were being paid for. Audit went quite well... a pleasant experience, even... perhaps one of the lucky few! (Guess had always wondered if was doing things correctly with Turbotax, so nice to have that confirmed.) A few minor adjustments, some in either direction that more-or-less offset. Oh, also had a typo in investment losses, so nice to learn losses, though substantial, not quite as bad as first thought. Auditor suggested to save time, to let go of business vehicle deductions for that year only, as without still no taxes due. Otherwise, would take significant time & effort to further substantiate and another day to review. Reluctantly, since had thorough gas and milage logs, elected that option, after being assured would in no way reflect had tried to claim something that should not have, but simply elected that as an audit time-saver for both Uncle Sam and myself. Back to the questions... In this scenario, must one list prior, accumulating NOL balances each year in "other income"? In other words, when no tax liability without applying NOL, is it still required to list past NOL's, to help IRS be aware of and/or track? Or, say even ten years from now, upon determining tax is due that year, list one or more NOL's in other income for that future year, having not listed any NOL's the prior nine? If audited, then provide schedule C & 1045 calculations of year(s) with NOL's, up to 20 yrs. old? Did not see the NOL carryforward election option in prior years with TurboTax... something newly implemented? Since no tax due, had thought no reason to list NOL's anywhere past few years. Thought if had listed prior year's NOL's, might "use them up" without reason, simply making that tax year substantially more negative. If no tax due this year without applying '07-'09 NOL's, will these NOL's still be fully available to carryforward in future years? Or, must one itemize prior yr. NOL's, making taxe liability even "more negative"? If so, does one simply list each yr NOL itemized under other income? Does one loose the NOL of prior yr(s) if did not list in one or more years as a substantial negative, under other income, even if no taxes due that yr? Or, does listing NOL total to date, make that year's return even more negative; i.e. "use it up"? Basically, can I simply keep my records of NOL each yr; then, when a future year (in upcoming 20) has taxes due, then list one or more of the old NOL's then, using up in chronological order? The latter is what had thought to do, but each year wondered if by not filing 1045, would I inadvertantly give up option to carryforwrd the NOL for that and previous years? As close to retirement, anticipate shifting remaining liquid assets into more dividend paying investments, which may will result in future taxes due. As boys turn 18 and enter college, exemptions will disappear & medical expenses may be less, fewer deductions resulting in possible taxable income from dividends then. When interest rates rise, may also...

Anonymous - 14 Oct 2011

You're my hero!

Great article! TOTALLY worth the price of admission!

One do I figure my unused portion of prior year NOLs? Does this only occur if I don't report the entire NOL from say, 2008 on my 2009 1040 line 21?

Gwenn Rosseau - 10 Apr 2011

When you have a Net Operating Loss, say in year 2007, this figure, calculated from your 2007 return, carries onto line 21 of your 2008 return as a negative answer in Other Income. That negative reduces your taxable income for 2008. Sometimes it reduces it beyond zero.

That means that in 2008, you also will likely have a Net Operating Loss, so on your 2009 return, you calculate your Net Operating Loss using the figures from your 2008 return, and the excess magically transfers over. You report the entire calculation on each return, the excess portion is when that reduces your taxable income below zero.

Will Johnson - 10 Apr 2011

Added the knol to top knols of business in 2010

Narayana Rao - 19 Mar 2011


I cannot thank you enough for taking the time to put a sense of humor, clarity of thought, with a dose of empathy for the readers. I read the IRS instructions regarding NOLs which was absolutely zero help. I called the IRS and after 2 hours of being transferred I had the great pleasure of talking to a supercilious-son-of-a-*itch; again no help. My reference book still left me with questions and then I found this guide. I paid for the rest of the article which enabled me to whip through the rest of Form 1045. You are a great communicator and I hope you continue publishing do-it-yourself guides.

This step by step guide that should be posted on the IRS homepage!!!!!
Thank you,

Anonymous - 29 Jan 2011


After completing schedule A and working my way down to line 15 (Taxable Income After carryback, on page 1) can I just look up the tax in that years tax table and enter that on line 16? I have mostly ordinary but some capital gain income. The taxes I originally paid in my carryback year were not straight from the tax table because of the capital gain component of my income. Thank you!

Anonymous - 31 Dec 2010