How to Deduct Net Operating Losses. When you have a business and your expenses exceed your income for the year, you may have a net operating loss (NOL) for the year. After preparing your Form 1040 tax return, if the amount on line 41 is a negative number, use Form 1045 to determine the allowable NOL.
Prepare your tax return to determine if line 41 has a negative number. If line 41 is a positive number, you don't have a net operating loss.
Download Form 1045 including Schedule A from the Internal Revenue Service (IRS) website (see Resources below). This form is used to figure the NOL and carry back if you have one, or you can use amended return Form 1040X.
Determine if you want to carry back the NOL to the prior 2 years or only to future years. Base this decision on what you anticipate your tax to be in the future years compared to the rates in the prior years.
Deduct the NOL in the carry back years if it is to your tax advantage to do so. If the NOL is not completely absorbed in the prior years, carry over the unused NOL to future years. Alternatively, if you foresee being in a higher tax bracket in the subsequent year, you could elect to carry the entire NOL forward.
Use Form 1045 to file your NOL carry back to the prior 2 years from the loss year. The advantage of using Form 1045 is that you will get your refund quicker than if you file amended return Forms 1040X for those years.
Carry forward to future years any NOL not used in years prior to the loss year and deduct the amount as a negative number on the Other Income line of Form 1040. Attach a statement which explains how you computed the NOL carry forward.