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Publication 536

How To Figure an NOL(p2)

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.

Form 1045, Schedule A.(p2)

Use Form 1045, Schedule A, to figure an NOL. The following discussion explains Schedule A.
First, complete Form 1045, 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 Form 1045, Schedule A, to figure your NOL.
Nonbusiness deductions (line 6).(p2)
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:
Do not include on line 6 the deduction for personal exemptions for you, your spouse, or your dependents.
Do not enter business deductions on line 6. These are deductions that are connected to your trade or business. They include the following.
Nonbusiness income (line 7).(p2)
Enter on line 7 only income that is not related to your trade or business or your employment. For example, enter your IRA distributions, pension benefits, social security benefits, 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, unemployment compensation included in your gross 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).(p3)

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).(p3)

The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses.
Nonbusiness capital losses.(p3)
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.(p3)
You can deduct your business capital losses (line 11) only up to the total of:

Domestic production activities deduction (line 23).(p3)

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).(p3)

You cannot deduct any NOL carryovers or carrybacks from other years. Enter the total amount of your NOL deduction for losses from other years.

Form 1045, Schedule A Example(p3)

The following example describes how to figure an NOL.


Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2017.
Wages from part-time job$1,225
Interest on savings425
Net long-term capital gain on sale of real estate used in business2,000
Glenn's total income$3,650
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
Standard deduction6,350
Personal exemption4,050
Glenn's total deductions$16,400
Glenn's deductions exceed his income by $12,750 ($16,400 − $3,650). However, to figure whether he has an NOL, certain deductions are not allowed. He uses Form 1045, Schedule A, to figure his NOL.
The following items are not allowed on Form 1045, Schedule A.
Nonbusiness net short-term capital loss$1,000
Nonbusiness deductions
(standard deduction, $6,350) minus
nonbusiness income (interest, $425)
Deduction for personal exemption4,050
Total adjustments to net loss$10,975
Therefore, Glenn's NOL for 2017 is figured as follows.
Glenn's total 2017 income$3,650
Glenn's original 2017 total deductions$16,400 
Reduced by the disallowed items− 10,975− 5,425
Glenn's NOL for 2017$1,775