How to Figure Alternative Tax & Net Operating Loss Deductions

If you are subject to the alternative minimum tax, you will lose the ability to take advantage of many common tax deductions. For example, you can no longer deduct state and local taxes from your income, and all miscellaneous itemized deductions are disallowed. If you own a business, and your deductions for business expenses were greater than the revenues from that business, you can still deduct up to 90 percent of the loss against your income as a net operating loss, even under alternative minimum tax rules.

Calculate your taxes using the traditional tax system. Fill out Form 1040 or 1040A (short form) individual income tax return. You will probably need to fill out one or more additional schedules, including Schedule A, Itemized Deductions and Schedule C, Profit or Loss from Business, and Schedule D, Capital Gains and Losses.

Download the Alternative Minimum Tax return, Form 6251, from the IRS's website (see “Resources”). Follow the instructions and proceed through the form, line by line, to figure your alternative minimum tax.

Calculate your Net Operating Loss, or NOL. You have an NOL whenever business deductions are greater than business income and nonbusiness income. Calculate your NOL using Schedule A of IRS Form 1045, Application for Tentative Refund. Start with your taxable income, adding back the personal exemption deduction and any deductions for net capital losses in excess of $3,000. Add back nonbusiness deductions to the extent they are greater than income received from nonbusiness activities. Your NOL deduction can be up to 90 percent of your income under AMT rules. This can potentially result in a significant reduction in your AMT tax liability.

Compare your income tax due on your Form 1040 or Form 1040A with the tax due on Form 6251. You must pay the higher of the two amounts.

Warnings

  • The alternative minimum tax and net operating loss calculation are highly technical fields within tax planning, frequently misunderstood except among tax professionals. The information on this page is not designed or intended to constitute tax advice. Consult a qualified tax professional for advice on your specific situation.

References

About the Author

Jason Van Steenwyk has been writing professionally since 1998. A former staff reporter for "Mutual Funds Magazine," he has been published in "Wealth and Retirement Planner," "Annuity Selling Guide," "Registered Rep." "Bankrate.com" and "Senior Market Advisor." He holds a Bachelor of Arts in humanities from the University of Southern California.