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Nonbusiness income (line 7). Enter on

DEDUCTIONS

lion or less during the 3-year period ending with

Net loss from business (gross

the tax year of the NOL. If the business did not

line 7 only income that is not related to your

income of $67,000 minus expenses

exist for this entire 3-year period, use the period

trade or business or your employment. For ex-

of $72,000) . . . . . . . . . . . . . . . . .

$5,000

the business was in existence.

ample, enter your annuity income, dividends,

Net short-term capital loss

and interest on investments. Also, include your

on sale of stock . . . . . . . . . . . . . .

1,000

Farming loss. The carryback period for a

share of nonbusiness income from partnerships

Standard deduction . . . . . . . . . . .

5,000

farming loss is 5 years. A farming loss is the

and S corporations.

Personal exemption . . . . . . . . . . .

3,200

smaller of:

Glenn’s total deductions

$14,200

Do not include on line 7 the income you

receive from your trade or business or your

1. The amount which would be the NOL for

Glenn’s deductions exceed his income by

employment. This includes salaries and wages,

the tax year if only income and deductions

$10,550 ($14,200 − $3,650). However, to figure

attributable to farming businesses were

self-employment income, and your share of

whether he has an NOL, certain deductions are

taken into account, or

business income from partnerships and S cor-

not allowed. He uses Schedule A (Form 1045) to

porations. Also, do not include rental income or

figure his NOL. See the illustrated Schedule A

2. The NOL for the tax year.

ordinary gain from the sale or other disposition

(Form 1045), later.

of business real estate or depreciable business

The following items are not allowed on

Farming business. A farming business is a

property.

Schedule A (Form 1045).

trade or business involving cultivation of land,

raising or harvesting of any agricultural or horti-

Nonbusiness net short-term capital

cultural commodity, operating a nursery or sod

Adjustment for section 1202 exclusion (line

loss . . . . . . . . . . . . . . . . . . . . . . . . $1,000

farm, raising or harvesting of trees bearing fruit,

17). Enter on line 17 any gain you excluded

Nonbusiness deductions

nuts, or other crops, or ornamental trees. The

under section 1202 on the sale or exchange of

(standard deduction, $5,000) minus

raising, shearing, feeding, caring for, training

qualified small business stock.

nonbusiness income (interest, $425) . .

4,575

and management of animals is also considered

Deduction for personal exemption . . . .

3,200

a farming business.

Adjustments for capital losses (lines 19 – 22).

Total adjustments to net loss

$8,775

A farming business does not include contract

The amount deductible for capital losses is lim-

harvesting of an agricultural or horticultural com-

ited based on whether the losses are business

modity grown or raised by someone else. It also

Therefore, Glenn’s NOL for 2005 is figured

does not include a business in which you merely

capital losses or nonbusiness capital losses.

as follows:

buy or sell plants or animals grown or raised by

Nonbusiness capital losses. You can de-

someone else.

duct your nonbusiness capital losses (line 2)

Glenn’s total 2005 income . . . . . . .

$3,650

Waiving the 5-year carryback. You can

only up to the amount of your nonbusiness capi-

Less:

choose to treat a farming loss as if it were not a

Glenn’s original 2005

tal gains without regard to any section 1202

farming loss. If you make this choice, the car-

total deductions . . . . . . $14,200

exclusion (line 3). If your nonbusiness capital

ryback period will be 2 years. To make this

Reduced by the

losses are more than your nonbusiness capital

disallowed items . . . . . . − 8,775

− 5,425

choice, attach a statement to your 2005 income

gains without regard to any section 1202 exclu-

Glenn’s NOL for 2005 . . . . . . . . . .

$1,775

tax return filed on or before the due date (includ-

sion, you cannot deduct the excess.

ing extensions) that you are choosing to treat

Business capital losses. You can deduct

any 2005 farming losses as if they were not

your business capital losses (line 11) only up to

farming losses under section 172(i)(3) of the

the total of:

Internal Revenue Code. If you do not make this

When To Use an NOL

election on your timely filed return, you have

•

Your nonbusiness capital gains that are

until 6 months after the due date of the return

Generally, if you have an NOL for a tax year

more than the total of your nonbusiness

(excluding extensions) to make the choice by

ending in 2005, you must carry back the entire

capital losses and excess nonbusiness

filing an amended return. Attach a statement to

amount of the NOL to the 2 tax years before the

deductions (line 10), and

your amended return and write “Filed pursuant

NOL year (the carryback period), and then carry

to section 301.9100-2” at the top of the state-

•

Your total business capital gains without

forward any remaining NOL for up to 20 years

ment. Send your amended return to the same

regard to any section 1202 exclusion (line

after the NOL year (the carryforward period).

address that you filed your original return. Once

12).

You can, however, choose not to carry back an

you make this choice, it is irrevocable.

NOL and only carry it forward. See Waiving the

Carryback Period, later. You cannot deduct any

Note. If you choose not to carry back any of

NOLs from other years (line 23). You cannot

part of the NOL remaining after the 20-year

your farming loss, you need to attach a state-

deduct any NOL carryovers or carrybacks from

carryforward period.

ment to your 2005 income tax return clearly

other years. Enter the total amount of your NOL

identifying what carryback or carrybacks are be-

deduction for losses from other years.

NOL year. This is the year in which the NOL

ing completely waived and stating that you are

occurred.

waiving them under sections 172(b)(3) and

Illustrated Schedule A (Form

172(i)(3) of the Internal Revenue Code. This

Exceptions to 2-Year

1045)

choice, once made, is also irrevocable. See

Carryback Rule

Waiving the Carryback Period, next.

The following example illustrates how to figure

an NOL. It includes filled-in pages 1 and 2 of

Eligible losses and farming losses, defined be-

Waiving the Carryback

Form 1040 and Schedule A (Form 1045).

low, qualify for longer carryback periods.

Period

Eligible loss. The carryback period for eligible

Example. Glenn Johnson is in the retail re-

You can choose not to carry back your NOL. If

losses is 3 years. An eligible loss is any part of

cord business. He is single and has the following

you make this choice, then you can use your

an NOL that:

income and deductions on his Form 1040 for

NOL only in the 20-year carryforward period.

•

2005.

Is from a casualty or theft, or

(This choice means you also choose not to carry

•

back any alternative tax NOL.)

Is attributable to a Presidentially declared

INCOME

disaster for a qualified small business.

To make this choice, attach a statement to

Wages from part-time job . . . . . . . .

$1,225

your original return filed by the due date (includ-

Interest on savings . . . . . . . . . . . . .

425

Qualified small business. A qualified small

ing extensions) for the NOL year. This statement

Net long-term capital gain on sale of

business is a sole proprietorship or a partner-

must show that you are choosing to waive the

real estate used in business . . . . . . .

2,000

ship that has average annual gross receipts

carryback period under section 172(b)(3) of the

Glenn’s total income

$3,650

(reduced by returns and allowances) of $5 mil-

Internal Revenue Code.

Page 3

Publication 536 - Net Operating Losses (Nols) For Individuals, Estates, And Trusts - 2005 Page 3

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