Publication 536 (2005), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

Tax Help Archives

Home > Tax Help Archives > 2005 > IRS Publications > IRS Publication 536

Pub. 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

2005 Tax Year

Publication 536 - Main Contents

Table of Contents

NOL Steps

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 41.

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.

How To Figure an NOL

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.
The domestic production activities 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,
Health savings account deduction,
Archer MSA deduction,
Itemized deductions (except for casualty and theft losses, state income tax on business profits, 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.
Educator expenses.
Moving expenses.
The deduction of one-half of your self-employment tax or your deduction for self-employed health insurance.
Domestic production activities deduction.
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).

Domestic production activities deduction. You cannot take the domestic production activities deduction when figuring your NOL. Enter on line 23 any domestic production activities deduction claimed on your return.

NOLs from other years (line 24). 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 2005.

INCOME
Wages from part-time job	$1,225
Interest on savings	425
Net long-term capital gain on sale of real estate used in business	2,000
Glenn's total income	$3,650

DEDUCTIONS
Net loss from business (gross income of $67,000 minus expenses of $72,000)	$5,000
Net short-term capital loss on sale of stock	1,000
Standard deduction	5,000
Personal exemption	3,200
Glenn's total deductions	$14,200

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1040, page 1

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1040, page 2

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1045, page 2

Glenn's deductions exceed his income by $10,550 ($14,200 - $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).

Nonbusiness net short-term capital loss	$1,000
Nonbusiness deductions (standard deduction, $5,000) minus nonbusiness income (interest, $425)	4,575
Deduction for personal exemption	3,200
Total adjustments to net loss	$8,775

Therefore, Glenn's NOL for 2005 is figured as follows:

Glenn's total 2005 income		$3,650
Less:
Glenn's original 2005 total deductions	$14,200
Reduced by the disallowed items	- 8,775	- 5,425
Glenn's NOL for 2005		$1,775

When To Use an NOL

Generally, if you have an NOL for a tax year ending in 2005, 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, farming losses, qualified GO Zone losses, and specified liability losses, defined below, qualify for longer carryback periods.

Eligible loss. The carryback period for eligible losses is 3 years. Only the eligible loss portion of the NOL can be carried back 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 or a qualified GO Zone loss.

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. Only the farming loss portion of the NOL can be carried back 5 years. A farming loss is the smaller of:

The amount that 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.

Certain timber losses. Income and deductions attributable to qualified timber property can be treated as attributable to a farming business if any portion of the property is located in the GO Zone, Rita GO Zone, or Wilma GO Zone, and the income and deductions are allocable to the part of the tax year which is after the applicable date below.

August 27, 2005, if any portion of the property is located in the GO Zone.
September 22, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone).
October 22, 2005, if any portion of the property is located in the Wilma GO Zone (but not in the GO Zone or the Rita GO Zone).

However, these rules apply only to a timber producer who:

Held qualified timber property (defined in Publication 535, Business Expenses) on the applicable date below:
1. August 28, 2005, if any portion of the property is located in the GO Zone,
2. September 23, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone), or
3. October 23, 2005, if any portion of the property is located in the Wilma GO Zone (but not in the GO Zone or the Rita GO Zone); and
Did not hold more than 500 acres of qualified timber property on the applicable date above.

See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for a list of counties and parishes included in the GO Zone, Rita GO Zone, and Wilma GO Zone.

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 (3 years to the extent the loss is an eligible loss). To make this choice, attach a statement to your 2005 income tax return filed on or before the due date (including extensions) that you are choosing to treat any 2005 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 choice 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 made, this choice is irrevocable.

Qualified GO Zone loss. The carryback period for a qualified GO Zone loss is 5 years. Only the qualified GO Zone loss portion of the NOL can be carried back 5 years. A qualified GO Zone loss is the smaller of:

The excess of the NOL for the year over the specified liability loss for the year to which a 10-year carryback applies, or
The total of the following deductions (to the extent they are taken into account in computing the NOL for the tax year):
1. Qualified GO Zone casualty loss (defined later),
2. Moving expenses paid or incurred after August 27, 2005, for the employment of an individual whose main home was in the GO Zone before August 28, 2005, who was unable to remain in that home because of Hurricane Katrina, and whose main job location (after the move) is in the GO Zone,
3. Temporary housing expenses paid or incurred after August 27, 2005, to house employees of the taxpayer whose main job location is in the GO Zone,
4. Depreciation or amortization allowable for any qualified GO Zone property (even if you elected not to claim the special GO Zone depreciation allowance for such property) for the year placed in service, and
5. Repair expenses (including expenses for the removal of debris) paid or incurred after August 27, 2005, for any damage from Hurricane Katrina to property located in the GO Zone.

See Publication 4492 for a list of counties and parishes included in the GO Zone.

To the extent the NOL is a qualified GO Zone loss, that part of the loss is carried back to the 5th tax year before the loss. Any such loss not used in that year is carried to the 4th preceding year and then applied consecutively forward through the 1st preceding year. Any such loss not applied in the 5 preceding years can be carried forward up to 20 years.

Qualified GO Zone casualty loss. A qualified GO Zone casualty loss is any deductible section 1231 loss of property located in the GO Zone if the loss was caused by Hurricane Katrina. For this purpose, the amount of the loss is reduced by any recognized gain from an involuntary conversion caused by Hurricane Katrina of property located in the GO Zone. Any such loss taken into account in figuring your qualified GO Zone loss is not eligible for the election to be treated as having occurred in the previous tax year.

Waiving the 5-year carryback. You can choose to treat a qualified GO Zone loss as if it were not a qualified GO Zone loss. If you make this choice, the loss carryback period will be 2 years (3 years to the extent the loss is an eligible loss). To make this choice for 2005, attach to your 2005 income tax return filed by the due date (including extensions) a statement that you are choosing to treat any 2005 qualified GO Zone losses as if they were not qualified GO Zone losses. If you filed your original return on time, you can make this choice on an amended return filed within 6 months after the due date of the return (including extensions). Attach a statement to your amended return, and write “Filed pursuant to section 301.9100-2” at the top of the statement. File the amended return at the same address you used for your original return. Once made, this choice is irrevocable.

Specified liability loss. The carryback period for a specified liability loss is 10 years. Only the specified liability loss portion of the NOL can be carried back 10 years. Generally, a specified liability loss is a loss arising from:

Product liability, or
An act (or failure to act) that occurred at least 3 years before the beginning of the loss year and resulted in a liability under a federal or state law requiring:

Reclamation of land,
Dismantling of a drilling platform,
Remediation of environmental contamination, or
Payment under any workers compensation act.

Any loss from a liability arising from (1) through (4) above can be taken into account as a specified liability loss only if you used an accrual method of accounting throughout the period in which the act (or failure to act) occurred. For details, see section 172(f).

Waiving the 10-year carryback. You can choose to treat a specified liability loss as if it were not a specified liability loss. If you make this choice, the loss carryback period will be 2 years (3 years to the extent the loss is an eligible loss; 5 years to the extent the loss is a farming loss). To make this choice for 2005, attach to your 2005 income tax return filed by the due date (including extensions) a statement that you are choosing to treat any 2005 specified liability losses as if they were not specified liability losses. If you filed your original return on time, you can make this choice on an amended return filed within 6 months after the due date of the return (excluding extensions). Attach a statement to your amended return, and write “Filed pursuant to section 301.9100-2” at the top of the statement. File the amended return at the same address you used for your original return. Once made, this choice is irrevocable.

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). Enter “Filed pursuant to section 301.9100-2” at the top of the statement.

Once you choose 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 2005 and had a $42,000 NOL for the year. No part of the NOL qualifies for the 3-year, 5-year, or 10-year carryback. You begin using your NOL in 2003, the second year before the NOL year, as shown in the following chart.

Year	Carryback/ Carryover	Unused Loss
2003	$42,000	$40,000
2004	40,000	37,000
2005 (NOL year)
2006	37,000	31,500
2007	31,500	22,500
2008	22,500	12,700
2009	12,700	4,000
2010	4,000	-0-

If your loss were larger, you could carry it forward until the year 2025. If you still had an unused 2005 carryforward after the year 2025, 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 2002. As shown in the following chart, $3,000 of this NOL is used in 2002. The remaining $1,000 is carried to 2003 with the $38,000 NOL that you must begin using in 2003.

Year	Carryback/ Carryover	Unused Loss
2002	$3,000	$1,000
2003	39,000	37,000
2004	37,000	34,000
2005 (NOL year)
2006	34,000	28,500
2007	28,500	19,500
2008	19,500	9,700
2009	9,700	1,000
2010	1,000	-0-

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.

Deducting a Carryback

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 2005 to 2003, you must file Form 1045 on or after the date you file your tax return for 2005, but no later than January 2, 2007.

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 2002 return by the April 15, 2003, due date, you must file a claim for refund of 2000 tax because of an NOL carryback from 2002 by April 17, 2006.

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.

Deducting a Carryforward

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 2005). Estates and trusts include an NOL deduction on Form 1041 with other deductions not subject to the 2% limit (line 15a for 2005).

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.

Change in Marital Status

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).

Change in Filing Status

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 2005. They have an NOL of $5,000. They carry the NOL back to 2003, a year in which Mark and Nancy filed separate returns. Figured separately, Nancy's 2005 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 2003 separate return.

Example 2.

Assume the same facts as in Example 1, except that both Mark and Nancy had deductions in 2005 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 2003 and separate returns for 2004 and 2005. In 2005, 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 2003 joint return and claim a $20,000 NOL deduction.

Their joint modified taxable income (MTI) for 2003 is $15,000, and their joint NOL carryover to 2004 is $5,000 ($20,000 - $15,000). Sam and Wanda each figure their separate MTI for 2003 as if they had filed separate returns. Then they figure their shares of the $5,000 carryover as follows.

Step 1.
Sam's separate MTI	$9,000
Wanda's separate MTI	+ 3,000
Total MTI	$12,000
Step 2.
Joint MTI	$15,000
Sam's MTI ÷ total MTI ($9,000 ÷ $12,000)	× .75
Sam's share of joint MTI	$11,250
Step 3.
Joint MTI	$15,000
Sam's share of joint MTI	- 11,250
Wanda's share of joint MTI	$3,750
Step 4.
Wanda's share of joint MTI	$3,750
Wanda's NOL deduction	- 2,000
Wanda's remaining share	$1,750
Step 5.
Sam's share of joint MTI	$11,250
Wanda's remaining share	+ 1,750
Joint MTI to be offset	$13,000
Step 6.
Sam's NOL deduction	$18,000
Joint MTI to be offset	- 13,000
Sam's carryover to 2004	$5,000
Joint carryover to 2004	$5,000
Sam's carryover	- 5,000
Wanda's carryover to 2004	$-0-

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 2004. 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 2004 is $5,000.

Illustrated Form 1045

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 2005 deductions are more than her 2005 income because of a business loss. She uses Form 1045 to carry back her NOL 2 years and claim an NOL deduction in 2003. (See the filled-in Form 1045 on page 11.) Her filing status in both years was single.

Martha figures her 2005 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 25, 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 12/31/03 on page 1 of Form 1045 using the following amounts from her 2003 return.

2003 Adjusted gross income		$50,000
Itemized deductions:
Medical expenses [$6,000 - ($50,000 × 7.5%)]	$2,250
State income tax	+ 2,000
Real estate tax	+ 4,000
Home mortgage interest	+ 5,000
Total itemized deductions		$13,250
Exemption		$3,050
Income tax		$5,241
Self-employment tax		$6,120

Martha refigures her taxable income for 2003 after carrying back her 2005 NOL as follows:

2003 Adjusted gross income		$50,000
Less:
NOL from 2005		-10,000
2003 Adjusted gross income after carryback		$40,000
Less:
Itemized deductions:
Medical expenses [$6,000 - ($40,000 × 7.5%)]	$3,000
State income tax	+ 2,000
Real estate tax	+ 4,000
Home mortgage interest	+ 5,000
Total itemized deductions		-14,000
Less:
Exemption		- 3,050
2003 Taxable income after carryback		$22,950

Martha then completes lines 10 through 25, using the “After carryback” column under the column for the second preceding tax year ended 12/31/03. 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 itemized deductions to $14,000 [$13,250 + ($3,000 - $2,250)].

Martha uses her refigured taxable income ($22,950) from line 15, and the tax tables in her 2003 Form 1040 instructions to find her income tax. She enters the new amount, $3,096, on line 16, and her new total tax liability, $9,216, on line 25.

Martha used up her $10,000 NOL in 2003 so she does not complete a column for the first preceding tax year ended 12/31/2004. The decrease in tax because of her NOL deduction (line 27) is $2,145.

Martha files Form 1045 after filing her 2005 return, but no later than January 2, 2007 (since December 31, 2006 is a Sunday). She mails it to the Internal Revenue Service Center where she filed her 2005 return and attaches a copy of her 2005 return (including the applicable forms and schedules).

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1045, page 1

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 2005 return includes an NOL deduction from an NOL year before 2005 that reduced your taxable income to zero (to less than zero, if an estate or trust), see NOL Carryover From 2005 to 2006, 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 2005, she has an NOL of $36,000 that she carries back to 2003. She has no other carrybacks or carryovers to 2003.

Ida's adjusted gross income in 2003 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 $3,050. 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 2003. She had no other deductions in 2003. Her taxable income for the year was $21,175.

Ida's $36,000 carryback will reduce her 2003 taxable income to zero. She completes the column for the second preceding tax year ended 12/31/03 of Schedule B (Form 1045) to figure how much of her NOL she uses up in 2003 and how much she can carry over to 2004. See the illustrated Schedule B shown on page 12. Ida does not complete the column for the first preceding tax year ended 12/31/04 because the $10,700 carryover to 2004 is completely used up that year. (See the information for line 9 below.)

Line 1. Ida enters $36,000, her 2005 net operating loss, on line 1.

Line 2. She enters $21,175, her 2003 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 2003 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 2003 is now $30,000.

Line 13. On her 2003 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 2003 and enters zero on line 19.

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

Line 21. Her actual contributions for 2003 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 2003 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 $3,050 for 2003.

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

Line 9. Ida figures her carryover to 2004 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 2004 on Form 1045, page 1, line 10, in the “After carryback” column under the column for the first preceding tax year ended 12/31/04. (For an illustrated example of page 1 of Form 1045, see Illustrated Form 1045 under How To Claim an NOL Deduction earlier.)

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1045, page 3

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 1045, page 4

NOL Carryover From 2005 to 2006

If you had an NOL deduction carried forward from a year prior to 2005 that reduced your taxable income on your 2005 return to zero (to less than zero, if an estate or trust), complete Table 1, Worksheet for NOL Carryover From 2005 to 2006. It will help you figure your NOL to carry to 2006. Keep the worksheet for your records.

Worksheet Instructions

At the top of the worksheet, enter the NOL year for which you are figuring the carryover.

More than one NOL. If your 2005 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 2006 is the total of the amount on line 10 of the worksheet and all later NOL amounts.

Example.

Your taxable income for 2005 is $4,000 without your $9,000 NOL deduction. Your NOL deduction includes a $2,000 carryover from 2003 and a $7,000 carryover from 2004. Subtract your 2003 NOL of $2,000 from $4,000. This gives you taxable income of $2,000. Your 2003 NOL is now completely used up. Subtract your $7,000 2004 NOL from $2,000. This gives you taxable income of ($5,000). You now complete the worksheet for your 2004 NOL. Your NOL carryover to 2006 is the unused part of your 2004 NOL from line 10 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 6. 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 6. Otherwise, increase your adjusted gross income by the total of lines 3 through 5 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 6.

Line 7. Enter zero if you claimed the standard deduction. Otherwise, use lines 11 through 42 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 7 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 7.

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 through 5 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 through 5 of the worksheet.
The NOL deduction for the NOL year entered at the top of the worksheet and for later years.

Line 11. 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 11.

Line 20. If you had a contributions carryover from 2004 to 2005 and your NOL deduction includes an amount from an NOL year before 2004, you may have to reduce your contributions carryover. This reduction is any adjustment you made to your 2004 charitable contributions deduction when figuring your NOL carryover to 2005. Use the reduced contributions carryover to figure the amount to enter on line 20.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Worksheet for NOL Carryover

This image is too large to be displayed in the current screen. Please click the link to view the image.

Worksheet for NOL Carryover (Continued)

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get 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, How To Get Help With Unresolved Tax Problems (now available in Chinese, Korean, Russian, and Vietnamese, in addition to English and Spanish).

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 2005 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 2005 tax return available because you will need to know your social security number, 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.

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 2005 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 2005 tax return available because you will need to know your social security number, 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 for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary, but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. 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 address below and receive a response within 10 business days after your request is received.

National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903

CD-ROM for tax products. You can order Publication 1796, IRS Tax Products CD-ROM, and obtain:

A CD that is released twice so you have the latest products. The first release ships in late December and the final release ships in late February.
Current-year forms, instructions, and publications.
Prior-year forms, instructions, and publications.
Tax Map: an electronic research tool and finding aid.
Tax law frequently asked questions (FAQs).
Tax Topics from the IRS telephone response system.
Fill-in, print, and save features for most tax forms.
Internal Revenue Bulletins.
Toll-free and email technical support.

Buy the CD-ROM from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $25 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $25 (plus a $5 handling fee).

CD-ROM for small businesses. Publication 3207, The Small Business Resource Guide CD-ROM for 2005, has a new look and enhanced navigation features. This year's CD includes:

Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
All the business tax forms, instructions, and publications needed to successfully manage a business.
Tax law changes for 2005.
IRS Tax Map to help you find forms, instructions, and publications by searching on a keyword or topic.
Web links to various government agencies, business associations, and IRS organizations.
“Rate the Product” survey—your opportunity to suggest changes for future editions.

An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting www.irs.gov/smallbiz.

Previous | First | Next

Publications Index | 2005 Tax Help Archives | Tax Help Archives Main | Home