A net operating loss qualifies you for a refund of taxes paid in prior years or a reduction of business income in future years. Generally, you can carry a NOL back two years or forward 20 years. There are a few exceptions that allow you to carry back the NOL three or five years. These exceptions relate to casualty losses, qualified business stock and farming losses, or you can simply elect to carry forward the NOL 20 years.
Form 1045 vs. Form 1040X
Use Form 1045 or Form 1040X to carry back your NOL. You get your refund faster by using Form 1045. If you use Form 1040X, you must use a separate Form 1040X for each carryback year. Both forms allow you to refigure your total tax liability for a carryback year. Generally, you must file Form 1045 on or after the date you file your tax return, but no later than one year after the NOL year. Form 1040X must be filed with three years after the due date, including extensions.
Figuring Net Operating Loss
IRS Publication 536 includes a worksheet to help compute your NOL. First complete your tax return for the year. If you have a negative figure on line 41 of Form 1040, you may have a NOL. The worksheet limits what you can deduct when figuring an NOL. Personal exemptions, capital losses in excess of capital gains, non business deductions and a few other deductions are added back to reduce the NOL.
If you choose to waive the carryback period, you can only carry forward your NOL 20 years. To make this election, attach a statement to your original return filed by the due date. The statement must show you are choosing to waive the carryback period under section 172(b)(3). To deduct a carryforward, list your NOL deduction as a negative number on line 21 of Form 1040. You must attach a statement that shows all the important facts and should include a computation showing how you figured your NOL. Use the worksheet in IRS Publication 536 each year to compute the remaining NOL to carry forward.
Doug Berthon is an enrolled agent and owns ProActive Tax & Accounting LLC. He earned his Bachelor of Science in accounting from Metropolitan University in St. Paul, Minn.