Do You Report an NOL?
Once you've determined the amount
of any net
operating loss (NOL) in your sole proprietorship business,
you need to decide whether to carry the loss backwards (and
claim a retroactive refund), or foward.
Net operating losses may be carried back for two years (or
for three years, in the case of a casualty loss) before the year
of the loss, which is called the NOL year. The loss is used to
offset the taxable income of those previous years, for the
earliest year first. Any unused portion of the loss may be
carried forward for up to 20 years after the NOL year.
To "carry a loss back," you may file a Form 1045, Application
for Tentative Refund within one year of the end of the NOL
year, or you can file an amended tax return for the year in
question within three years of the NOL year.
If your NOL year was 2001 and you filed your
tax return on April 15, 2002, you can file Form
1045 any time on or after April 15 of 2002 but
before January 1, 2003, to claim a refund for
1999. Or, you can file a 1040X for 1999 any time
before April 15 of 2005.
Whichever form you use to claim the carryback, you must use
Schedule A of Form 1045 to compute the amount of the NOL. If the
entire loss isn't used up within the permitted period, no
further net operating loss carryover is permitted.
If you like, you can elect to forgo the carryback period,
instead choosing to deduct the net operating loss only over the
next 20 years in the future. If so, you must attach a statement
to your tax return for the NOL year, or to an amended return for
that year filed within six months of its due date excluding
extensions. The statement must assert that you are electing to
forgo the carryback period under Section 172(b)(3) of the
Internal Revenue Code.
Because carrying back a net operating loss to
a prior tax year can result in a quick tax
refund, it will usually be unwise to pass up the
carryback period, unless you're quite sure that
your business will be in a higher tax bracket in
Mechanics of a carryback. When you carry back an NOL,
you must refigure your tax for the carryback year by recomputing
your adjusted gross income (AGI) for that year. Then you must
recompute any items that were limited by your AGI amount, such
as the special allowance for passive activities, taxable social
security benefits, IRA deductions, and excludable savings bond
Next, refigure your taxable income if needed to reflect the
change in your itemized deductions for medical expenses,
casualty losses, miscellaneous itemized deductions, and the
overall limit on itemized deductions and phaseout of personal
exemptions for higher-income taxpayers. You will also have to
refigure your AMT, if it applied to you. However, do not
refigure your self-employment tax for the carryback year.
If you don't use up your entire NOL in the first carryback
year, you may have a carryover, and you'll need to use Schedule
B of Form 1045 to compute the amount.
If you carry forward an NOL, things are a little simpler. You
would list your NOL figure as a negative amount on the
"other income" line of Form 1040 (Line 21 on the
version of this form for tax year 2001), and attach a statement
showing how you computed the NOL.