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.

1. Individuals--line 37 of Form 1040.
2. Estates and trusts--line 22 of Form 1041.
3. 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.

1. Personal exemptions.
2. Capital losses in excess of capital gains. (Nonbusiness capital losses may only offset nonbusiness capital gains.)
3. The section 1202 exclusion of 50% of the gain from the sale or exchange of qualified small business stock.
4. Nonbusiness deductions in excess of nonbusiness income.
5. 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:

1. Is from a casualty or theft, or
2. 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:

1. 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
2. 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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