| Pub. 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts |
2004 Tax Year |
Main Contents
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Follow Steps 1 through 5 to figure and use your NOL.
Step 1.
Complete your tax return for the year. You may have an NOL if a negative figure appears on the line below:
| Individuals — Form 1040, line 40. |
| Estates and trusts — Form 1041, line 22. |
If the amount on that line is not negative, stop here — you do not have an NOL.
Step 2.
Determine whether you have an NOL and its amount. See How To Figure an NOL, later. If you do not have an NOL, stop here.
Step 3.
Decide whether to carry the NOL back to a past year or to waive the carryback period and instead carry the NOL forward
to a future year. See
When To Use an NOL, later.
Step 4.
Deduct the NOL in the carryback or carryforward year. See How To Claim an NOL Deduction, later. If your NOL deduction is equal to or
less than your taxable income without the deduction, stop here — you have used up your NOL.
Step 5.
Determine the amount of your unused NOL. See How To Figure an NOL Carryover, later. Carry over the unused NOL to the next carryback or
carryforward year and begin again at Step 4.
Note.
If your NOL deduction includes more than one NOL amount, apply Step 5 separately to each NOL amount, starting with the amount
from the earliest
year.
If your deductions for the year are more than your income for the year, you may have an NOL.
There are rules that limit what you can deduct when figuring an NOL. In general, the following items are not allowed when
figuring an NOL.
-
Any deduction for personal exemptions.
-
Capital losses in excess of 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.
Schedule A (Form 1045).
Use Schedule A (Form 1045) to figure an NOL. The following discussion explains Schedule A and includes an illustrated
example.
First, complete Schedule A, line 1, using amounts from your return. If line 1 is a negative amount, you may have an
NOL.
Next, complete the rest of Schedule A to figure your NOL.
Nonbusiness deductions (line 6).
Enter on line 6 deductions that are not connected to your trade or business or your employment. Examples of deductions
not related to your trade or
business are:
-
Alimony,
-
Contributions to an IRA or other self-employed retirement plan,
-
Itemized deductions (except for casualty and theft losses and any employee business expenses), and
-
The standard deduction (if you do not itemize your deductions).
Do not enter business deductions on line 6. These are deductions that are connected to your trade or business. They
include the following.
-
State income tax on business profits.
-
Moving expenses.
-
The deduction of one-half of your self-employment tax or your deduction for self-employed health insurance.
-
Rental losses.
-
Loss on the sale or exchange of business real estate or depreciable property.
-
Your share of a business loss from a partnership or S corporation.
-
Ordinary loss on the sale or exchange of stock in a small business corporation or a small business investment company.
-
If you itemize your deductions, casualty and theft losses (even if they involve nonbusiness property) and employee business
expenses (such
as union dues, uniforms, tools, education expenses, and travel and transportation expenses).
-
Loss on the sale of accounts receivable (if you use an accrual method of accounting).
-
Interest and litigation expenses on state and federal income taxes related to your business.
-
Unrecovered investment in a pension or annuity claimed on a decedent's final return.
-
Payment by a federal employee to buy back sick leave used in an earlier year.
Nonbusiness income (line 7).
Enter on line 7 only income that is not related to your trade or business or your employment. For example, enter your
annuity income, dividends,
and interest on investments. Also, include your share of nonbusiness income from partnerships and S corporations.
Do not include on line 7 the income you receive from your trade or business or your employment. This includes salaries
and wages, self-employment
income, and your share of business income from partnerships and S corporations. Also, do not include rental income or ordinary
gain from the sale or
other disposition of business real estate or depreciable business property.
Adjustment for section 1202 exclusion (line 17).
Enter on line 17 any gain you excluded under section 1202 on the sale or exchange of qualified small business stock.
Adjustments for capital losses (lines 19–22).
The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness
capital losses.
Nonbusiness capital losses.
You can deduct your nonbusiness capital losses (line 2) only up to the amount of your nonbusiness capital gains without
regard to any section 1202
exclusion (line 3). If your nonbusiness capital losses are more than your nonbusiness capital gains without regard to any
section 1202 exclusion, you
cannot deduct the excess.
Business capital losses.
You can deduct your business capital losses (line 11) only up to the total of:
-
Your nonbusiness capital gains that are more than the total of your nonbusiness capital losses and excess nonbusiness deductions
(line 10),
and
-
Your total business capital gains without regard to any section 1202 exclusion (line 12).
NOLs from other years (line 23).
You cannot deduct any NOL carryovers or carrybacks from other years. Enter the total amount of your NOL deduction
for losses from other years.
Illustrated Schedule A (Form 1045)
The following example illustrates how to figure an NOL. It includes filled-in pages 1 and 2 of Form 1040 and Schedule A (Form
1045).
Example.
Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040
for 2004.
Glenn's deductions exceed his income by $10,300 ($13,950 - $3,650). However, to figure whether he has an NOL, certain deductions
are not
allowed. He uses Schedule A (Form 1045) to figure his NOL. See the illustrated Schedule A (Form 1045), later.
The following items are not allowed on Schedule A (Form 1045).
Therefore, Glenn's NOL for 2004 is figured as follows:
Generally, if you have an NOL for a tax year ending in 2004, you must carry back the entire amount of the NOL to the 2 tax
years before the NOL
year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward
period). You can,
however, choose not to carry back an NOL and only carry it forward. See Waiving the Carryback Period, later. You cannot deduct any part of
the NOL remaining after the 20-year carryforward period.
NOL year.
This is the year in which the NOL occurred.
Exceptions to 2-Year Carryback Rule
Eligible losses and farming losses, defined below, qualify for longer carryback periods.
Eligible loss.
The carryback period for eligible losses 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.
Qualified small business.
A qualified small business is a sole proprietorship or a partnership that has average annual gross receipts (reduced
by returns and allowances) of
$5 million or less during the 3-year period ending with the tax year of the NOL. If the business did not exist for this entire
3-year period, use the
period the business was in existence.
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.
Farming business.
A farming business is a trade or business involving cultivation of land, raising or harvesting of any agricultural
or horticultural commodity,
operating a nursery or sod farm, raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees.
The raising, shearing,
feeding, caring for, training and management of animals is also considered a farming business.
A farming business does not include contract harvesting of an agricultural or horticultural commodity grown or raised
by someone else. It also does
not include a business in which you merely buy or sell plants or animals grown or raised by someone else.
Waiving the 5-year carryback.
You can choose to treat a farming loss as if it were not a farming loss. If you make this choice, the carryback period
will be 2 years. To make
this choice, attach a statement to your 2004 income tax return filed on or before the due date (including extensions) that
you are choosing to treat
any 2004 farming losses as if they were not farming losses under section 172(i)(3) of the Internal Revenue Code. If you do
not make this election on
your timely filed return, you have until 6 months after the due date of the return (excluding extensions) to make the choice
by filing an amended
return. Attach a statement to your amended return and write “ Filed pursuant to section 301.9100-2” at the top of the statement. Send your amended
return to the same address that you filed your original return. Once you make this choice, it is irrevocable.
Note.
If you choose not to carry back any of your farming loss, you need to attach a statement to your 2004 income tax return clearly
identifying what
carryback or carrybacks are being completely waived and stating that you are waiving them under sections 172(b)(3) and 172(i)(3)
of the Internal
Revenue Code. This choice, once made, is also irrevocable. See Waiving the Carryback Period, next.
Waiving the Carryback Period
You can choose not to carry back your NOL. If you make this choice, then you can use your NOL only in the 20-year carryforward
period. (This choice
means you also choose not to carry back any alternative tax NOL.)
To make this choice, attach a statement to your original return filed by the due date (including extensions) for the NOL year.
This statement must
show that you are choosing to waive the carryback period under section 172(b)(3) of the Internal Revenue Code.
If you filed your return timely but did not file the statement with it, you must file the statement with an amended return
for the NOL year within
6 months of the due date of your original return (excluding extensions). Write “Filed pursuant to section 301.9100-2” at the top of the
statement.
Once you elect to waive the carryback period, it is irrevocable. If you choose to waive the carryback period for more than
one NOL, you must make a
separate choice and attach a separate statement for each NOL year.
If you do not file this statement on time, you cannot waive the carryback period.
How To Carry an NOL Back or Forward
If you choose to carry back the NOL, 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.
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 the unused part to the next year. Continue to
carry any unused part of the
NOL forward until the NOL is used up or you complete the 20-year carryforward period.
Example 1.
You started your business as a sole proprietor in 2004 and had a $42,000 NOL for the year. No part of the NOL qualifies for
the 3-year or 5-year
carryback. You begin using your NOL in 2002, the second year before the NOL year, as shown in the following chart.
If your loss were larger, you could carry it forward until the year 2024. If you still had an unused 2004 carryforward after
the year 2024, you
could not deduct it.
Example 2.
Assume the same facts as in Example 1, except that $4,000 of the NOL is attributable to a casualty loss and this loss qualifies
for a 3-year
carryback period. You begin using the $4,000 in 2001. As shown in the following chart, $3,000 of this NOL is used in 2001.
The remaining $1,000 is
carried to 2002 with the $38,000 NOL that you must begin using in 2002.
How To Claim an NOL Deduction
If you have not already carried the NOL to an earlier year, your NOL deduction is the total NOL. If you carried the NOL to
an earlier year, your
NOL deduction is the NOL minus the amount you used in the earlier year or years.
If you carry more than one NOL to the same year, your NOL deduction is the total of these carrybacks and carryovers.
NOL more than taxable income.
If your NOL is more than the taxable income of the year you carry it to (figured before deducting the NOL), you generally
will have an NOL
carryover to the next year. See How To Figure an NOL Carryover, later, to determine how much NOL you have used and how much you carry to
the next year.
If you carry back your NOL, you can use either Form 1045 or Form 1040X. You can get your refund faster by using Form 1045,
but you have a shorter
time to file it. You can use Form 1045 to apply an NOL to all carryback years. If you use Form 1040X, you must use a separate
Form 1040X for each
carryback year to which you apply the NOL.
Estates and trusts not filing Form 1045 must file an amended Form 1041 (instead of Form 1040X) for each carryback year to
which NOLs are applied.
Use a copy of the appropriate year's Form 1041, check the Amended return box, and follow the Form 1041 instructions for amended
returns. Include the
NOL deduction with other deductions not subject to the 2% limit (line 15a). Also, see the special procedures for filing an
amended return due to an
NOL carryback, explained under Form 1040X, later.
Form 1045.
You can apply for a quick refund by filing Form 1045. This form results in a tentative adjustment of tax in the carryback
year. See the Form 1045
illustrated at the end of this discussion.
If the IRS refunds or credits an amount to you from Form 1045 and later determines that the refund or credit is too
much, the IRS may assess and
collect the excess immediately.
Generally, you must file Form 1045 on or after the date you file your tax return for the NOL year, but not later than
one year after the NOL year.
If the last day of the year falls on a Saturday, Sunday, or holiday, the form will be considered timely if postmarked on the
next business day. For
example, if you are a calendar year taxpayer with a carryback from 2004 to 2002, you must file Form 1045 on or after the date
you file your tax return
for 2004, but no later than January 3, 2006.
Form 1040X.
If you do not file Form 1045, you can file Form 1040X to get a refund of tax because of an NOL carryback. File Form
1040X within 3 years after the
due date, including extensions, for filing the return for the NOL year. For example, if you are a calendar year taxpayer and
filed your 2001 return by
the April 15, 2002, due date, you must file a claim for refund of 1999 tax because of an NOL carryback from 2001 by April
15, 2005.
Attach a computation of your NOL using Schedule A (Form 1045) and, if it applies, your NOL carryover using Schedule
B (Form 1045), discussed later.
Refiguring your tax.
To refigure your total tax liability for a carryback year, first refigure your adjusted gross income for that year.
(On Form 1045, use lines 10
through 11 and the After carryback column for the applicable carryback year.) Use your adjusted gross income after applying
the NOL deduction to
refigure income or deduction items that are based on, or limited to, a percentage of your adjusted gross income. Refigure
the following items.
-
The special allowance for passive activity losses from rental real estate activities.
-
Taxable social security and tier 1 railroad retirement benefits.
-
IRA deductions.
-
Excludable savings bond interest.
-
Excludable employer-provided adoption benefits.
-
Student loan interest deduction.
-
Tuition and fees deduction.
If more than one of these items apply, refigure them in the order listed above, using your adjusted gross income after
applying the NOL deduction
and any previous item. (Enter your NOL deduction on Form 1045, line 10. On line 11, using the “ After carryback” column, enter your adjusted
gross income after applying the above refigured items but without the NOL deduction. )
Next, refigure your taxable income. (On Form 1045, use lines 12 through 15 and the “ After carryback” column.) Use your refigured adjusted
gross income (Form 1045, line 11, using the “ After carryback” column) to refigure certain deductions and other items that are based on, or
limited to, a percentage of your adjusted gross income. Refigure the following items.
-
The itemized deduction for medical expenses.
-
The itemized deduction for casualty losses.
-
Miscellaneous itemized deductions subject to the 2% limit.
-
The overall limit on itemized deductions.
-
The phaseout of the deduction for exemptions.
Do not refigure the itemized deduction for charitable contributions.
Finally, use your refigured taxable income (Form 1045, line 15, using the “ After carryback” column) to refigure your total tax liability.
Refigure your income tax, your alternative minimum tax, and any credits that are based on, or limited to, the amount of tax.
(On Form 1045, use lines
16 through 25, and the “ After carryback” column.) The earned income credit, for example, may be affected by changes to adjusted gross income or
the amount of tax (or both) and, therefore, must be recomputed. If you become eligible for a credit because of the carryback,
complete the form for
that specific credit (such as the EIC Worksheet) for that year.
While it is necessary to refigure your income tax, alternative minimum tax, and credits, do not refigure your self-employment
tax.
If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on the Other
income line of Form 1040
(line 21 for 2004). Estates and trusts include an NOL deduction on Form 1041 with other deductions not subject to the 2% limit
(line 15a for 2004).
You must attach a statement that shows all the important facts about the NOL. Your statement should include a computation
showing how you figured
the NOL deduction. If you deduct more than one NOL in the same year, your statement must cover each of them.
If you and your spouse were not married to each other in all years involved in figuring NOL carrybacks and carryovers, only
the spouse who had the
loss can take the NOL deduction. If you file a joint return, the NOL deduction is limited to the income of that spouse.
For example, if your marital status changes because of death or divorce, and in a later year you have an NOL, you can carry
back that loss only to
the part of the income reported on the joint return (filed with your former spouse) that was related to your taxable income.
After you deduct the NOL
in the carryback year, the joint rates apply to the resulting taxable income.
Refund limit.
If you are not married in the NOL year (or are married to a different spouse), and in the carryback year you were
married and filed a joint return,
your refund for the overpaid joint tax may be limited. You can claim a refund for the difference between your share of the
refigured tax and your
contribution toward the tax paid on the joint return. The refund cannot be more than the joint overpayment. Attach a statement
showing how you figured
your refund.
Figuring your share of a joint tax liability.
There are five steps for figuring your share of the refigured joint tax liability.
-
Figure your total tax as though you had filed as married filing separately.
-
Figure your spouse's total tax as though your spouse had also filed as married filing separately.
-
Add the amounts in (1) and (2).
-
Divide the amount in (1) by the amount in (3).
-
Multiply the refigured tax on your joint return by the amount figured in (4). This is your share of the joint tax liability.
Figuring your contribution toward tax paid.
Unless you have an agreement or clear evidence of each spouse's contributions toward the payment of the joint tax
liability, figure your
contribution by adding the tax withheld on your wages and your share of joint estimated tax payments or tax paid with the
return. If the original
return for the carryback year resulted in an overpayment, reduce your contribution by your share of the tax refund. Figure
your share of a joint
payment or refund by the same method used in figuring your share of the joint tax liability. Use your taxable income as originally
reported on the
joint return in steps (1) and (2) above, and substitute the joint payment or refund for the refigured joint tax in step (5).
If you and your spouse were married and filed a joint return for each year involved in figuring NOL carrybacks and carryovers,
figure the NOL
deduction on a joint return as you would for an individual. However, treat the NOL deduction as a joint NOL.
If you and your spouse were married and filed separate returns for each year involved in figuring NOL carrybacks and carryovers,
the spouse who
sustained the loss may take the NOL deduction on a separate return.
Special rules apply for figuring the NOL carrybacks and carryovers of married people whose filing status changes for any tax
year involved in
figuring an NOL carryback or carryover.
Separate to joint return.
If you and your spouse file a joint return for a carryback or carryforward year, and were married but filed separate
returns for any of the tax
years involved in figuring the NOL carryback or carryover, treat the separate carryback or carryover as a joint carryback
or carryover.
Joint to separate returns.
If you and your spouse file separate returns for a carryback or carryforward year, but filed a joint return for any
or all of the tax years
involved in figuring the NOL carryover, figure each of your carryovers separately.
Joint return in NOL year.
Figure each spouse's share of the joint NOL through the following steps.
-
Figure each spouse's NOL as if he or she filed a separate return. See How To Figure an NOL, earlier. If only one spouse has an
NOL, stop here. All of the joint NOL is that spouse's NOL.
-
If both spouses have an NOL, multiply the joint NOL by a fraction, the numerator of which is spouse A's NOL figured in (1)
and the
denominator of which is the total of the spouses' NOLs figured in (1). The result is spouse A's share of the joint NOL. The
rest of the joint NOL is
spouse B's share.
Example 1.
Mark and Nancy are married and file a joint return for 2004. They have an NOL of $5,000. They carry the NOL back to 2002,
a year in which Mark and
Nancy filed separate returns. Figured separately, Nancy's 2004 deductions were more than her income, and Mark's income was
more than his deductions.
Mark does not have any NOL to carry back. Nancy can carry back the entire $5,000 NOL to her 2002 separate return.
Example 2.
Assume the same facts as in Example 1, except that both Mark and Nancy had deductions in 2004 that were more than their income.
Figured separately,
his NOL is $1,800 and hers is $3,000. The sum of their separate NOLs ($4,800) is less than their $5,000 joint NOL because
his deductions included a
$200 net capital loss that is not allowed in figuring his separate NOL. The loss is allowed in figuring their joint NOL because
it was offset by
Nancy's capital gains. Mark's share of their $5,000 joint NOL is $1,875 ($5,000 × $1,800/$4,800) and Nancy's is $3,125 ($5,000
- $1,875).
Joint return in previous carryback or carryforward year.
If only one spouse had an NOL deduction on the previous year's joint return, all of the joint carryover is that spouse's
carryover. If both spouses
had an NOL deduction (including separate carryovers of a joint NOL, figured as explained in the previous discussion), figure
each spouse's share of
the joint carryover through the following steps.
-
Figure each spouse's modified taxable income as if he or she filed a separate return. See Modified taxable income under How
To Figure an NOL Carryover, later.
-
Multiply the joint modified taxable income you used to figure the joint carryover by a fraction, the numerator of which is
spouse A's
modified taxable income figured in (1) and the denominator of which is the total of the spouses' modified taxable incomes
figured in (1). This is
spouse A's share of the joint modified taxable income.
-
Subtract the amount figured in (2) from the joint modified taxable income. This is spouse B's share of the joint modified
taxable
income.
-
Reduce the amount figured in (3), but not below zero, by spouse B's NOL deduction.
-
Add the amounts figured in (2) and (4).
-
Subtract the amount figured in (5) from spouse A's NOL deduction. This is spouse A's share of the joint carryover. The rest
of the joint
carryover is spouse B's share.
Example.
Sam and Wanda filed a joint return for 2002 and separate returns for 2003 and 2004. In 2004, Sam had an NOL of $18,000 and
Wanda had an NOL of
$2,000. They choose to carry back both NOLs 2 years to their 2002 joint return and claim a $20,000 NOL deduction.
Their joint modified taxable income (MTI) for 2002 is $15,000, and their joint NOL carryover to 2003 is $5,000 ($20,000 –
$15,000). Sam and
Wanda each figure their separate MTI for 2002 as if they had filed separate returns. Then they figure their shares of the
$5,000 carryover as follows.
Wanda's $2,000 NOL deduction offsets $2,000 of her $3,750 share of the joint modified taxable income and is completely used
up. She has no
carryover to 2003. Sam's $18,000 NOL deduction offsets all of his $11,250 share of joint modified taxable income and the remaining
$1,750 of Wanda's
share. His carryover to 2003 is $5,000.
The following example illustrates how to use Form 1045 to claim an NOL deduction in a carryback year. It includes a filled-in
page 1 of Form 1045.
Example.
Martha Sanders is a self-employed contractor. Martha's 2004 deductions are more than her 2004 income because of a business
loss. She uses Form 1045
to carry back her NOL 2 years and claim an NOL deduction in 2002. (See the filled-in Form 1045 on page 10.) Her filing status
in both years was
single.
Martha figures her 2004 NOL on Schedule A, Form 1045 (not shown). (For an example using Schedule A, see Illustrated Schedule A (Form 1045)
under How To Figure an NOL, earlier.) She enters the $10,000 NOL from Schedule A, line 24, on Form 1045, line 1a.
Martha completes lines 10 through 25, using the “Before carryback” column under the column for the second preceding tax year ended 12/31/02 on
page 1 of Form 1045 using the following amounts from her 2002 return.
Martha refigures her taxable income for 2002 after carrying back her 2004 NOL as follows:
Martha then completes lines 10 through 25, using the “After carryback” column under the column for the second preceding tax year ended
12/31/02. On line 10, Martha enters her $10,000 NOL deduction. Her new adjusted gross income on line 11 is $40,000 ($50,000
- $10,000). To
complete line 12, she must refigure her medical expense deduction using her new adjusted gross income. Her refigured medical
expense deduction is
$3,000 [$6,000 - ($40,000 × 7.5%)]. This increases her total deductions to $14,000 [$13,250 + ($3,000 - $2,250)].
Martha uses her refigured taxable income ($23,000) from line 15, and the tax tables in her 2002 Form 1040 instructions to
find her income tax. She
enters the new amount, $3,154, on line 16, and her new total tax liability, $9,274, on line 25.
Martha used up her $10,000 NOL in 2002 so she does not complete a column for the first preceding tax year ended 12/31/2003.
The decrease in tax
because of her NOL deduction (line 27) is $2,311.
Martha files Form 1045 after filing her 2004 return, but no later than January 3, 2006 (since December 31, 2005 is a Saturday).
She mails it to the
Internal Revenue Service Center where she filed her 2004 return and attaches a copy of her 2004 return (including the applicable
forms and schedules).
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.
-
You cannot claim an NOL deduction for the NOL carryover you are figuring or for any later NOL.
-
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).
-
You cannot claim a deduction for your exemptions for yourself, your spouse, or dependents.
-
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 2004 return includes an NOL deduction from an NOL year before 2004 that reduced
your taxable income to
zero (to less than zero, if an estate or trust), see NOL Carryover From 2004 to 2005, 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 2004, she has an NOL of $36,000 that she carries back to 2002. She has no other carrybacks
or carryovers
to 2002.
Ida's adjusted gross income in 2002 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 $3,000. 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 2002. She had no other deductions in 2002. Her taxable income for the year was $21,225.
Ida's $36,000 carryback will reduce her 2002 taxable income to zero. She completes the column for the second preceding tax
year ended 12/31/02 of
Schedule B (Form 1045) to figure how much of her NOL she uses up in 2002 and how much she can carry over to 2003. See the
illustrated Schedule B shown
on page 12. Ida does not complete the column for the first preceding tax year ended 12/31/03 because the $10,700 carryover
to 2003 is completely used
up that year. (See the information for line 9 below.)
Line 1. Ida enters $36,000, her 2004 net operating loss, on line 1.
Line 2. She enters $21,225, her 2002 taxable income, on line 2.
Line 3. Ida enters her net capital loss deduction of $1,000 on line 3.
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. Ida had itemized deductions and entered $1,000 on line 3, so 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 2002 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 2002 is now $30,000.
Line 13. On her 2002 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 2002 and enters zero on line 19.
Line 20. Her modified adjusted gross income remains $30,000.
Line 21. Her actual contributions for 2002 were $1,450, which she enters on line 21.
Line 22. She now refigures her charitable contributions based on her modified adjusted gross income. Her contributions are well below
the 50% limit, so 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 2002 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 the deduction for her personal exemption of $3,000 for 2002.
Line 8. After combining lines 2 through 7, Ida's modified taxable income is $25,300.
Line 9. Ida figures her carryover to 2003 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 the $10,700 as her NOL deduction for 2003 on Form 1045, page 1, line
10, in the “After
carryback” column under the column for the first preceding tax year ended 12/31/03. (For an illustrated example of page 1 of Form 1045,
see
Illustrated Form 1045 under How To Claim an NOL Deduction earlier.)
NOL Carryover From 2004 to 2005
If you had an NOL deduction carried forward from a year prior to 2004 that reduced your taxable income on your 2004 return
to zero (to less than
zero, if an estate or trust), complete Table 1, Worksheet for NOL Carryover From 2004 to 2005. It will help you figure your
NOL to carry to 2005. Keep
the worksheet for your records.
At the top of the worksheet, enter the NOL year for which you are figuring the carryover.
More than one NOL.
If your 2004 NOL deduction includes amounts for more than one loss year, complete this worksheet only for one loss
year. To determine which year,
start with your earliest NOL and subtract each NOL separately from your taxable income figured without the NOL deduction.
Complete this worksheet for
the earliest NOL that reduces your taxable income below zero. Your NOL carryover to 2005 is the total of the amount on line
9 of the worksheet and all
later NOL amounts.
Example.
Your taxable income for 2004 is $4,000 without your $9,000 NOL deduction. Your NOL deduction includes a $2,000 carryover from
2002 and a $7,000
carryover from 2003. Subtract your 2002 NOL of $2,000 from $4,000. This gives you taxable income of $2,000. Your 2002 NOL
is now completely used up.
Subtract your $7,000 2003 NOL from $2,000. This gives you taxable income of ($5,000). You now complete the worksheet for your
2003 NOL. Your NOL
carryover to 2005 is the unused part of your 2003 NOL from line 9 of the worksheet.
Line 2.
Treat your NOL deduction for the NOL year entered at the top of the worksheet and later years as a positive amount.
Add it to your negative taxable
income. Enter the result on line 2.
Line 5.
You must refigure the following income and deductions based on adjusted gross income.
-
The special allowance for passive activity losses from rental real estate activities.
-
Taxable social security and tier 1 railroad retirement benefits.
-
IRA deduction.
-
Excludable savings bond interest.
-
Excludable employer-provided adoption benefits.
-
Student loan interest deduction.
-
Tuition and fees deduction.
If none of these items apply to you, enter zero on line 5. Otherwise, increase your adjusted gross income by the total
of lines 3 and 4 and your
NOL deduction for the NOL year entered at the top of the worksheet and later years. Using this increased adjusted gross income,
refigure the items
that apply, in the order listed above. Your adjustment for each item is the difference between the refigured amount and the
amount included on your
return. Combine the adjustments for previous items with your adjusted gross income before refiguring the next item. Keep a
record of your
computations.
Enter your total adjustments for the above items on line 5.
Line 6.
Enter zero if you claimed the standard deduction. Otherwise, use lines 10 through 41 of the worksheet to figure the
amount to enter on this line.
Complete only those sections that apply to you.
Estates and trusts.
Enter zero on line 6 if you did not claim any miscellaneous deductions on Form 1041, line 15b, or a casualty or theft
loss. Otherwise, refigure
these deductions by substituting modified adjusted gross income (see below) for adjusted gross income. Subtract the recomputed
deductions from those
claimed on the return. Enter the result on line 6.
Modified adjusted gross income.
To refigure miscellaneous itemized deductions of an estate or trust (Form 1041, line 15b), modified adjusted gross
income is the total of the
following amounts.
-
The adjusted gross income on the return.
-
The amounts from lines 3 and 4 of the worksheet.
-
The exemption amount from Form 1041, line 20.
-
The NOL deduction for the NOL year entered at the top of the worksheet and for later years.
To refigure the casualty and theft loss deduction of an estate or trust, modified adjusted gross income is the total
of the following amounts.
-
The adjusted gross income amount you used to figure the deduction claimed on the return.
-
The amounts from lines 3 and 4 of the worksheet.
-
The NOL deduction for the NOL year entered at the top of the worksheet and for later years.
Line 10.
Treat your NOL deduction for the NOL year entered at the top of the worksheet and for later years as a positive amount.
Add it to your adjusted
gross income. Enter the result on line 10.
Line 19.
If you had a contributions carryover from 2003 to 2004 and your NOL deduction includes an amount from an NOL year
before 2003, you may have to
reduce your contributions carryover. This reduction is any adjustment you made to your 2003 charitable contributions deduction
when figuring your NOL
carryover to 2004. Use the reduced contributions carryover to figure the amount to enter on line 19.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information
from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights
and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision,
they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
-
Call the Taxpayer Advocate toll free at
1-877-777-4778.
-
Call, write, or fax the Taxpayer Advocate office in your area.
-
Call 1-800-829-4059 if you are a
TTY/TDD user.
-
Visit
www.irs.gov/advocate.
For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS—How To Get Help With Unresolved
Tax Problems.
Free tax services.
To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of
free tax publications and an
index of tax topics. It also describes other free tax information services, including tax education and assistance programs
and a list of TeleTax
topics.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at
www.irs.gov to:
-
E-file your return. Find out about commercial tax preparation and e-file services available free to eligible
taxpayers.
-
Check the status of your 2004 refund. Click on Where's My Refund. Be sure to wait at least 6 weeks from the date you filed your
return (3 weeks if you filed electronically). Have your 2004 tax return available because you will need to know your filing
status and the exact whole
dollar amount of your refund.
-
Download forms, instructions, and publications.
-
Order IRS products online.
-
Research your tax questions online.
-
Search publications online by topic or keyword.
-
View Internal Revenue Bulletins (IRBs) published in the last few years.
-
Figure your withholding allowances using our Form W-4 calculator.
-
Sign up to receive local and national tax news by email.
-
Get information on starting and operating a small business.
Fax. You can get over 100 of the most requested forms and instructions 24 hours a day, 7 days a week, by fax. Just call 703-368-9694
from the telephone connected to your fax machine. When you call, you will hear instructions on how to use the service. The
items you request will be
faxed to you.
For help with transmission problems, call 703-487-4608.
Long-distance charges may apply.
Phone. Many services are available by phone.
-
Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications
and prior-year forms and instructions. You should receive your order within 10 days.
-
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
-
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local
Taxpayer Assistance Center
for an appointment. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
-
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and
publications.
-
TeleTax topics. Call 1-800-829-4477 and press 2 to listen to pre-recorded messages covering various tax topics.
-
Refund information. If you would like to check the status of your 2004 refund, call 1-800-829-4477 and press 1 for automated
refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if
you filed electronically).
Have your 2004 tax return available because you will need to know your filing status and the exact whole dollar amount of
your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to
sometimes listen in on or
record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
-
Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions,
and office supply stores
have a collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices
and libraries have the
Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
-
Services. You can walk in to your local Taxpayer Assistance Center every business day to ask tax questions or get help with a tax
problem. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. You
can set up an appointment by
calling your local Center and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will
call you back within 2
business days to schedule an in-person appointment at your convenience. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a
response
within 10 business days after your request is received. Use the address that applies to your part of the country.
-
Western part of U.S.:
Western Area Distribution Center
Rancho Cordova, CA 95743-0001
-
Central part of U.S.:
Central Area Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
-
Eastern part of U.S. and foreign addresses:
Eastern Area Distribution Center
P.O. Box 85074
Richmond, VA 23261-5074
CD-ROM for tax products. You can order Publication 1796, IRS Federal Tax Products CD-ROM, and obtain:
-
Current-year forms, instructions, and publications.
-
Prior-year forms and instructions.
-
Frequently requested tax forms that may be filled in electronically, printed out for submission, or saved for recordkeeping.
-
Internal Revenue Bulletins.
Buy the CD-ROM from National Technical Information Service (NTIS) at
www.irs.gov/cdorders for $22 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The
first release is available in early January and the final release is available in late February.
CD-ROM for small businesses. Publication 3207, The Small Business Resource Guide, CD-ROM 2004, is a must for every small business owner
or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions, and
publications needed to
successfully manage a business. In addition, the CD provides other helpful information, such as how to prepare a business
plan, finding financing for
your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats
and browsers that can be run
on virtually any desktop or laptop computer.
It is available in early April. You can get a free copy by calling 1-800-829-3676 or by visiting
www.irs.gov/smallbiz.
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