How Do I Carry Over Negative Income?
- 1). Ensure that you have a negative taxable income. If the amount listed on line 41 of your 1040 tax return is negative, you may have a NOL.
- 2). Calculate the NOL amount. Your negative taxable income is not equal to your NOL; certain deductions must be backed out. Take the balance listed on line 41 of your 1040, which will properly exclude all exemptions from calculating your NOL. Add back to that amount any deduction for personal exemptions; capital losses in excess of capital gains; the section 1202 exclusion of 50 percent of gain from the sale of qualified small business stock; non-business deductions (such as alimony or deductions for contributions to an IRA) in excess of non-business income; the net operating loss deduction; and the domestic production activities deductions. Use Schedule A of Form 1045 to help calculate your NOL.
- 3). Ensure that you want to carry the losses forward. NOLs allow you to offset future income, but you can also go back to the previous two tax years and apply the NOL to that income.
- 4). Record the amount of the NOL for your records.
- 5). Prepare a written statement describing the NOL. This should state in what tax year the NOL was generated and how the NOL was calculated.
- 6). Determine if your NOL is in excess of your taxable income for the tax year to which the deduction will be applied. Your taxable income for this purpose is determined prior to deducting any NOL. If your NOL is in excess of taxable income, the amount of NOL you can claim in that year is equal to your modified taxable income. Your modified taxable income is your taxable income plus any NOL deduction taken; any excess of capital losses over capital gains; any section 1202 exclusion taken on your Schedule D; domestic production activities deduction; any exemption you claim for yourself, spouse, or dependents; and the difference of any deductions that would be affected by any of these changes due to a higher adjusted gross income (AGI).
- 7). Record the permissible NOL deduction as a negative amount on your personal tax return. This amount is recorded as other income. This is line 21 on a 1040 or 1040NR at the time of publication.
- 8). Continue these steps every year until you exhaust the NOL.
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