How To Figure an NOL Carryover

If your NOL is more than your taxable income for the year to which you carry it (figured before deducting the NOL), you may have an NOL carryover. You must make certain modifications to your taxable income to determine how much NOL you will use up in that year and how much you can carry over to the next tax year. Your carryover is the excess of your NOL deduction over your modified taxable income for the carryback or carryforward year. If your NOL deduction includes more than one NOL, apply the NOLs against your modified taxable income in the same order in which you incurred them, starting with the earliest.

Modified taxable income. Your modified taxable income is your taxable income figured with the following changes.

1. You cannot claim an NOL deduction for the NOL carryover you are figuring or for any later NOL.
2. You cannot claim a deduction for capital losses in excess of your capital gains. Also, you must increase your taxable income by the amount of any section 1202 exclusion claimed on Schedule D (Form 1040).
3. You cannot claim your exemptions for yourself, your spouse, or dependents.
4. You must figure any item affected by the amount of your adjusted gross income after making the changes in (1) and (2), above, and certain other changes to your adjusted gross income that result from (1) and (2). This includes income and deduction items used to figure adjusted gross income (for example, IRA deductions), as well as certain itemized deductions. To figure a charitable contribution deduction, do not include deductions for NOL carrybacks in the change in (1) but do include deductions for NOL carryforwards from tax years before the NOL year.

Your taxable income as modified cannot be less than zero.

Schedule B (Form 1045). You can use Schedule B (Form 1045) to figure your modified taxable income for carryback years and your carryover from each of those years. Do not use Schedule B for a carryforward year. If your 2001 return includes an NOL deduction from an NOL year before 2001 that reduced your taxable income to zero (to less than zero, if an estate or trust), see NOL Carryover From 2001 to 2002, later.

Illustrated Schedule B (Form 1045)

The following example illustrates how to figure an NOL carryover from a carryback year. It includes a filled-in Schedule B (Form 1045).

Example. Ida Brown runs a small clothing shop. In 2001, she has an NOL of $36,000 that she chooses to carry back to 1999. She has no other carrybacks or carryovers to 1999.

Ida's adjusted gross income in 1999 was $29,000, consisting of her salary of $30,000 minus a $1,000 capital loss deduction. She is single and claimed only one personal exemption of $2,750. During that year, she gave $1,450 in charitable contributions. Her medical expenses were $2,725. She also deducted $1,650 in taxes and $1,125 in home mortgage interest.

Her deduction for charitable contributions was not limited because her contributions, $1,450, were less than 50% of her adjusted gross income. The deduction for medical expenses was limited to expenses over 7.5% of adjusted gross income (.075 × $29,000 = $2,175; $2,725 - $2,175 = $550). The deductions for taxes and home mortgage interest were not subject to any limits. She was able to claim $4,775 ($1,450 + $550 + $1,650 + $1,125) in itemized deductions for 1999. She had no other deductions in 1999. Her taxable income for the year was $21,475.

Ida's $36,000 carryback will reduce her 1999 taxable income to zero. She completes the column labeled 2nd preceding tax year ended
12/31/1999 of Schedule B (Form 1045) to figure how much of her NOL she uses up in 1999 and how much she can carry over to 2000. See the illustrated Schedule B shown on page 12. Ida does not complete the column for the first preceding tax year ended 12/31/2000 because the $10,700 carryover to 2000 is completely used up that year. (See the information for line 9, below.)

Line 1. Ida enters $36,000, her 2001 net operating loss, on line 1.

Line 2. She enters $21,475, her 1999 taxable income, on line 2.

Line 3. Ida enters on line 3 her net capital loss deduction of $1,000.

Line 5. Although Ida's entry on line 3 modifies her adjusted gross income, that does not affect any other items included in her adjusted gross income. Ida enters zero on line 5.

Line 6. Since Ida had itemized deductions and entered $1,000 on line 3, she completes lines 10 through 34 to figure her adjustment to itemized deductions. On line 6, she enters the total adjustment from line 34.

Line 10. Ida's adjusted gross income for 1999 was $29,000.

Line 11. She adds lines 3 through 5 and enters $1,000 on line 11. (This is her net capital loss deduction added back, which modifies her adjusted gross income.)

Line 12. Her modified adjusted gross income for 1999 is now $30,000.

Line 13. On her 1999 tax return, she deducted $550 as medical expenses.

Line 14. Her actual medical expenses were $2,725.

Line 15. She multiplies her modified adjusted gross income, $30,000, by .075. She enters $2,250 on line 15.

Line 16. The difference between her actual medical expenses and the amount she is allowed to deduct is $475.

Line 17. The difference between her medical deduction and her modified medical deduction is $75. She enters this on line 17.

Line 18. She enters her modified adjusted gross income of $30,000 on line 18.

Line 19. She had no other carrybacks to 1999 and enters zero on line 19.

Line 20. Her modified adjusted gross income remains $30,000.

Line 21. Her actual contributions for 1999 were $1,450, which she enters on line 21.

Line 22. She now refigures her charitable contributions based on her modified adjusted gross income. Since she is well below the 50% limit, she enters $1,450 on line 22.

Line 23. The difference is zero.

Lines 24 through 33. Ida had no casualty losses or deductions for miscellaneous items in 1999 so she leaves these lines blank.

Line 34. She combines lines 17, 23, 28, and 33 and enters $75 on line 34. She carries this figure to line 6.

Line 7. Ida enters her personal exemption of $2,750 for 1999.

Line 8. After combining lines 2 through 7, Ida's modified taxable income is $25,300.

Line 9. Ida figures her carryover to 2000 by subtracting her modified taxable income (line 8) from her NOL deduction (line 1). She enters the $10,700 carryover on line 9. She also enters this $10,700 as her NOL deduction for 2000 on line 11 of page 1, Form 1045, in the After carryback column under the column labeled 1st preceding tax year ended 12/31/2000. (For an illustrated example of page 1 of Form 1045, see Illustrated Form 1045 under How To Claim an NOL Deduction, earlier.)

Form 1045, page 3

Form 1045, page 4

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