Publication 225 |
2000 Tax Year |
Net Operating Losses
If your deductible loss from operating your farm (after applying
the at-risk and passive activity limits explained in the preceding
discussion) is more than your other income for the year, you may have
a net operating loss (NOL). You may also have an NOL if you had a
personal or business-related casualty or theft loss that was more than
your income.
If you have an NOL this year, you can carry it to other years and
deduct it. You may be able to get a refund of all or part of the
income tax you paid for past years, or you may be able to reduce your
tax in future years.
To determine if you have an NOL, complete your tax return for the
year. You may have an NOL if a negative figure appears on the line
shown below.
- Individuals--line 37 of Form 1040.
- Estates and trusts--line 22 of Form 1041.
- Corporations--line 30 of Form 1120 or line 26 of Form
1120-A.
If the amount on that line is zero or more, you do not have an NOL.
There are rules that limit what you can deduct from gross income
when figuring an NOL. These rules are discussed in detail under
How To Figure an NOL in Publication 536.
In general, these rules do not allow the following items.
- Personal exemptions.
- Capital losses in excess of capital gains. (Nonbusiness
capital losses may only offset nonbusiness capital gains.)
- The section 1202 exclusion of 50% of the gain from the sale
or exchange of qualified small business stock.
- Nonbusiness deductions in excess of nonbusiness
income.
- Net operating loss deduction.
Example.
Glenn Johnson is a dairy farmer. He is single and has the following
income and deductions on his Form 1040 for 2000.
INCOME |
Wages from part-time job |
$1,225 |
Interest on savings |
425 |
Net long-term capital gain
on sale of farm acreage |
2,000 |
Glenn's total income |
$3,650 |
DEDUCTIONS |
Net loss from farming business (income of
$67,000 minus expenses of $72,000) |
$5,000 |
Net short-term capital loss
on sale of stock |
1,000 |
Standard deduction |
4,400 |
Personal exemption |
2,800 |
Glenn's total deductions |
$13,200 |
Glenn's deductions exceed his income by $9,550 ($13,200 -
$3,650). However, to figure whether he has an NOL, he must modify
certain deductions. He can use Schedule A (Form 1045) to
figure his NOL.
Glenn cannot deduct the following items.
Nonbusiness net short-term capital loss |
$1,000 |
Nonbusiness deductions
(standard deduction, $4,400) minus
nonbusiness income (interest, $425) |
3,975 |
Personal exemption |
2,800 |
Total adjustments to net loss |
$7,775 |
When these items are eliminated, Glenn's net loss is reduced to
$1,775 ($9,550 - $7,775). This is his NOL for 2000.
Carrybacks.
Generally, you carry an NOL back to the 2 tax years before the NOL
year and deduct it from income you had in those years. You can choose
not to carry back an NOL and only carry it forward. See Waiving
the carryback period, later. There are rules for figuring how
much of the NOL is used in each tax year and how much is carried to
the next tax year. These rules are explained in Publication 536.
Unless you choose to waive the carryback period, as discussed
later, you must first carry the entire NOL to the earliest carryback
year. If your NOL is not used up, you can carry the rest to the next
earliest carryback year, and so on.
Refigure your deductions, credits, and tax for each of the years to
which you carried back an NOL. If your refigured tax is less than the
tax you originally paid, you can apply for a refund by filing Form
1040X, Amended U.S. Individual Income Tax Return, for each
year affected, or by filing Form 1045. You will usually get a refund
faster by filing Form 1045, and generally you can use one Form 1045 to
apply an NOL to all carryback years.
Exceptions to 2-year carryback rule.
Eligible losses and farming losses qualify for longer carryback
periods.
Eligible loss.
The carryback period for an eligible loss is 3 years. An eligible
loss is any part of an NOL that:
- Is from a casualty or theft, or
- Is attributable to a Presidentially declared disaster for a
qualified small business.
An eligible loss does not include a farming loss (explained next).
Farming loss.
The carryback period for a farming loss is 5 years. A farming loss
is the smaller of:
- The amount which would be the NOL for the tax year if only
income and deductions attributable to farming businesses were taken
into account, or
- The NOL for the tax year.
You can choose to treat a farming loss as if it were not a farming
loss. If you make this choice, the loss is subject to the 2-year
carryback period. For more information, see When To Use an NOL
in Publication 536.
Carryovers.
If you do not use up the NOL in the carryback years, carry forward
what remains of it to the 20 tax years following the NOL year. Start
by carrying it to the first tax year after the NOL year. If you do not
use it up, carry over the unused part to the next year. Continue to
carry over any unused part of the NOL until you use it up or complete
the 20-year carryforward period.
For an NOL occurring in a tax year beginning before August 6, 1997,
the carryforward period is 15 years.
Waiving the carryback period.
You can choose not to carry back your NOL. If you make this choice,
you use your NOL only in the carryforward period.
To make this choice, attach a statement to your tax return for the
NOL year filed on or before the due date of the return (including
extensions). This statement must show you are choosing to waive the
carryback period under section 172(b)(3) of the Internal Revenue Code.
Also, if you filed your return timely without making that choice, you
may still make the choice by filing an amended return within 6 months
of the due date of the return (excluding extensions). Attach the
statement to the amended return and write "FILED PURSUANT TO SECTION
301.9100-2" on the statement. File the amended return at the
same address you filed the original return. Once made, the choice is
irrevocable and the carryforward is limited to 20 years.
Partnerships and S corporations.
Partnerships and S corporations cannot use an NOL. But partners or
shareholders can use their separate shares of the partnership's or S
corporation's business income and business deductions to figure their
individual NOLs.
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