Category: Tax Questions
Net Operating Loss Worksheet/Form 1045
If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). A NOL is used to reduce your taxable income in another year or years. A loss from operating a business is the most common reason for an NOL.
To have an NOL, your loss must generally be caused by deductions from your:
- Trade or business
- Work as an employee
- Casualty and theft losses
- Moving expenses
- Rental property
Partnerships and S corporations generally cannot use an NOL. However, partners or shareholders can use their separate shares of the partnership's or S Corporation’s business income and business deductions to figure their individual NOLs.
There are rules that limit what can be deducted 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.
- 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.
Generally, when there is a NOL at the end of the year, then you have to carryback the whole NOL to the two tax years before the NOL year ('carryback period'). Then, if there is any leftover NOL after the carryback period, you carryforward the balance for up to 20 years after the NOL year ('carryforward period'). You can't deduct any part of the NOL after the carryforward period.
The taxpayer can elect to waive the two-year carryback period and use the NOL for the carryforward period only. This may be advantageous if the taxable income in the past two years was low or if they expect to have a lot of taxable income after the NOL year. To waive the carryback period, attach a statement to the original tax return for the NOL year specifying that you're foregoing the carryback period.
In order to calculate the refund for a NOL carryback, tax preparers can either use Form 1045, Application for Tentative Refund or Form 1040X, Amended US Individual Income Tax Return. When using Form 1045, only one form needs to be prepared and can include up to three previous years of NOL carryback. If Form 1040X is used, a separate form must be prepared for each year the NOL is being carried back.
Follow the steps below to create Form 1045 from the Miscellaneous Forms Menu:
- Select Net Operating Loss Worksheet/Form 1045
- Select Form 1045 - Application for Tentative Refund, to calculate the carryback amounts.
- Enter the number of years you wish to carry back the NOL
- Select the year you want to apply the NOL to first and complete the worksheet for that year.
If you wish to forego the carryback period, select IRC Sec 172(b)(c) Election to Forego the Carryback Period, and select 'YES'.
Click here for instructions on creating an amended return.