IRS Releases Publication 536 (2016), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
Publication 536 (2016)
- Jurisdictions
- LanguageEnglish
Future Developments
For the latest information about developments related to Pub. 536, such as legislation enacted after it was published, go to http://www.irs.gov/pub536.
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If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years.
What this publication covers. This publication discusses NOLs for individuals, estates, and trusts. It covers:
• How to figure an NOL,
• When to use an NOL,
• How to claim an NOL deduction, and
• How to figure an NOL carryover.
To have an NOL, your loss must generally be caused by deductions from your:
• Trade or business,
• Work as an employee,
• Casualty and theft losses,
• Moving expenses, or
• Rental property.
A loss from operating a business is the most common reason for an NOL.
Partnerships and S corporations generally cannot use an NOL. However, partners or shareholders can use their separate shares of the partnership's or S corporation's business income and business deductions to figure their individual NOLs.
Keeping records. You should keep records for any tax year that generates an NOL for 3 years after you have used the carryback/carryforward or 3 years after the carryforward expires.
TIP: You should attach all required documents to the Form 1045 or Form 1040X. For details, see the instructions for Form 1045 or Form 1040X.
What is not covered in this publication? The following topics are not covered in this publication.
• Bankruptcies. See Pub. 908, Bankruptcy Tax Guide.
• NOLs of corporations. See Pub. 542, Corporations.
Section references. Section references are to the Internal Revenue Code unless otherwise noted.
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Useful Items
You may want to see:
Form (and Instructions)
• Form 1040X Amended U.S. Individual Income Tax Return
• Form 1045 Application for Tentative Refund
See How To Get Tax Help near the end of this publication for information about getting these forms.
Follow Steps 1 through 5 to figure and use your NOL.
Step 1. Complete your tax return for the year. You may have an NOL if a negative amount appears on the line below.
• Individuals -- Form 1040, line 41, or Form 1040NR, line 39.
• Estates and trusts -- See the instructions for Form 1041, line 22, for information about taxable income and NOLs.
Step 2. Determine whether you have an NOL and its amount. See How To Figure an NOL, later. If you do not have an NOL, stop here.
Step 3. Decide whether to carry the NOL back to a past year or to waive the carryback period and instead carry the NOL forward to a future year. See When To Use an NOL, later.
Step 4. Deduct the NOL in the carryback or carryforward year. See How To Claim an NOL Deduction, later. If your NOL deduction is equal to or less than your taxable income without the deduction, stop here -- you have used up your NOL.
Step 5. Determine the amount of your unused NOL. See How To Figure an NOL Carryover, later. Carry over the unused NOL to the next carryback or carryforward year and begin again at Step 4.
Note. If your NOL deduction includes more than one NOL amount, apply Step 5 separately to each NOL amount, starting with the amount from the earliest year.
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.
• Any deduction for personal exemptions.
• Capital losses in excess of capital gains.
• The section 1202 exclusion of the gain from the sale or exchange of qualified small business stock.
• Nonbusiness deductions in excess of nonbusiness income.
• The net operating loss deduction.
• The domestic production activities deduction.
Form 1045, Schedule A. 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). 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:
• Alimony paid,
• Deductions for contributions to an IRA or a self-employed retirement plan,
• Health savings account deduction,
• Archer medical savings account deduction,
• Most itemized deductions (except for casualty and theft losses, state income tax on trade and business income, and any employee business expenses), and
• The standard deduction.
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.
• State income tax on income attributable to trade or business (including wages, salary, and unemployment compensation).
• Moving expenses.
• Educator expenses.
• The deduction for the deductible part of self-employed health insurance.
• Domestic production activities deduction.
• Rental losses.
• Loss on the sale or exchange of business real estate or depreciable property.
• Your share of a business loss from a partnership or an S corporation.
• Ordinary loss on the sale or exchange of stock in a small business corporation or a small business investment company.
• If you itemize your deductions, casualty and theft losses (even if they involve nonbusiness property) and employee business expenses (such as union dues, uniforms, tools, education expenses, and travel and transportation expenses).
• Loss on the sale of accounts receivable (if you use an accrual method of accounting).
• Interest and litigation expenses on state and federal income taxes related to your business.
• Unrecovered investment in a pension or annuity claimed on a decedent's final return.
• Payment by a federal employee to buy back sick leave used in an earlier year.
Nonbusiness income (line 7). Enter on line 7 only income that is not related to your trade or business or your employment. For example, enter your 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). 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). The amount deductible for capital losses is limited based on whether the losses are business capital losses or nonbusiness capital losses.
Nonbusiness capital losses. 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. You can deduct your business capital losses (line 11) only up to the total of:
• Your nonbusiness capital gains that are more than the total of your nonbusiness capital losses and excess nonbusiness deductions (line 10), and
• Your total business capital gains without regard to any section 1202 exclusion (line 12).
Domestic production activities deduction (line 23). 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). 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
The following example describes how to figure an NOL.
Example. Glenn Johnson is in the retail record business. He is single and has the following income and deductions on his Form 1040 for 2016.
INCOME
Wages from part-time job $1,225
Interest on savings 425
Net long-term capital gain on sale
of real estate used in business 2,000
------
Glenn's total income $3,650
======
DEDUCTIONS
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 1,000
Standard deduction 6,300
Personal exemption 4,050
-------
Glenn's total deductions $16,350
=======
Glenn's deductions exceed his income by $12,700 ($16,350 - $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, $6,300) minus
nonbusiness income (interest, $425) 5,875
Deduction for personal exemption 4,050
-------
Total adjustments to net loss $10,925
=======
Therefore, Glenn's NOL for 2016 is figured as follows.
Glenn's total 2016 income $3,650
Less:
Glenn's original 2016 total
deductions $16,350
Reduced by the disallowed
items - 10,925 - 5,425
------- -------
Glenn's NOL for 2016 $1,775
=======
When To Use an NOL
Generally, if you have an NOL for a tax year ending in 2016, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward period). You can, however, choose not to carry back an NOL and only carry it forward. See Waiving the Carryback Period, later. You cannot deduct any part of the NOL remaining after the 20-year carryforward period.
NOL year. This is the year in which the NOL occurred.
Exceptions to 2-Year Carryback Rule
Eligible losses, farming losses, qualified disaster losses, and specified liability losses, all defined next, qualify for longer carryback periods.
Eligible loss. The carryback period for eligible losses is 3 years. Only the eligible loss portion of the NOL can be carried back 3 years. An eligible loss is any part of an NOL that:
• Is from a casualty or theft, or
• Is attributable to a federally declared disaster for a qualified small business or certain qualified farming businesses.
Qualified small business. A qualified small business is a sole proprietorship or a partnership that has average annual gross receipts (reduced by returns and allowances) of $5 million or less during the 3-year period ending with the tax year of the NOL. If the business did not exist for this entire 3-year period, use the period the business was in existence.
An eligible loss does not include a farming loss or a qualified disaster loss.
Farming loss. The carryback period for a farming loss is 5 years. Only the farming loss portion of the NOL can be carried back 5 years. A farming loss is the smaller of:
1. The amount that would be the NOL for the tax year if only income and deductions attributable to farming businesses were taken into account, or
2. The NOL for the tax year.
Farming business. A farming business is a trade or business involving cultivation of land or the raising or harvesting of any agricultural or horticultural commodity. A farming business can include operating a nursery or sod farm or raising or harvesting most ornamental trees or trees bearing fruit, nuts, or other crops. The raising, shearing, feeding, caring for, training, and management of animals is also considered a farming business.
A farming business does not include contract harvesting of an agricultural or horticultural commodity grown or raised by someone else. It also does not include a business in which you merely buy or sell plants or animals grown or raised entirely by someone else.
Waiving the 5-year carryback. You can choose to figure the carryback period for a farming loss without regard to the special 5-year carryback rule. To make this choice for 2016, attach to your 2016 income tax return filed by the due date (including extensions) a statement that you are choosing to treat any 2016 farming losses without regard to the special 5-year carryback rule. If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months after the due date of the return (excluding extensions). Attach an election statement to your amended return, and write "Filed pursuant to section 301.9100-2" at the top of the statement. Once made, this choice is irrevocable.
Qualified disaster loss. The carryback period for a qualified disaster loss is 5 years. Only the qualified disaster loss portion of the NOL can be carried back 5 years. A qualified disaster loss is the smaller of:
1. The sum of:
a. Any losses attributable to a federally declared disaster and occurring before January 1, 2010, in the disaster area, plus
b. Any qualified disaster expenses that were allowable under section 198A (even if you did not choose to treat those expenses as deductions in the current year), or
2. The NOL for the tax year.
Excluded losses. A qualified disaster loss does not include any losses from property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store for which the principal business is the sale of alcoholic beverages for consumption off premises.
A qualified disaster loss also does not include any losses from any gambling or animal racing property. Gambling or animal racing property is any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing, and the portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless this portion is less than 100 square feet.
Specified liability loss. The carryback period for a specified liability loss is 10 years. Only the specified liability loss portion of the NOL can be carried back 10 years. Generally, a specified liability loss is a loss arising from:
• Product liability and expenses incurred in the investigation or settlement of, or opposition to, product liability claims, or
• An act (or failure to act) that occurred at least 3 years before the beginning of the loss year and resulted in a liability under a federal or state law requiring:
• Reclamation of land,
• Dismantling of a drilling platform,
• Remediation of environmental contamination, or
• Payment under any workers' compensation act.
Waiving the 10-year carryback. You can choose to figure the carryback period for a specified liability loss without regard to the special 10-year carryback rule. To make this choice for 2016, attach to your 2016 income tax return filed by the due date (including extensions) a statement that you are choosing to treat any 2016 specified liability losses without regard to the special 10-year carryback rule. If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months after the due date of the return (excluding extensions). Attach a statement to your amended return and write "Filed pursuant to section 301.9100-2" at the top of the statement. Once made, this choice is irrevocable.
Waiving the Carryback Period
You can choose not to carry back your NOL. If you make this choice, then you can use your NOL only in the 20-year carryforward period. (This choice means you also choose not to carry back any alternative tax NOL.)
To make this choice, attach a statement to your original return filed by the due date (including extensions) for the NOL year. This statement must show that you are choosing to waive the carryback period under section 172(b)(3).
If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to your amended return, and write "Filed pursuant to section 301.9100-2" at the top of the statement.
Once you choose to waive the carryback period, it generally is irrevocable. If you choose to waive the carryback period for more than one NOL, you must make a separate choice and attach a separate statement for each NOL year.
CAUTION: If you do not file this statement on time, you cannot waive the carryback period.
How To Carry an NOL Back or Forward
If you choose to carry back the NOL, you must first carry the entire NOL to the earliest carryback year. If your NOL is not used up, you can carry the rest to the next earliest carryback year, and so on.
If you waive the carryback period or do not use up the NOL in the carryback period, carry forward what remains of the NOL to the 20 tax years following the NOL year. Start by carrying it to the first tax year after the NOL year. If you do not use it up, carry the unused part to the next year. Continue to carry any unused part of the NOL forward until the NOL is used up or you complete the 20-year carryforward period.
Example 1. You started your business as a sole proprietor in 2016 and had a $42,000 NOL for the year. No part of the NOL qualifies for the 3-year, 5-year, or 10-year carryback. You begin using your NOL in 2014, the second year before the NOL year, as shown in the following chart.
Carryback/ Unused
Year Carryover Loss
2014 $42,000 $40,000
2015 40,000 37,000
2016 (NOL year)
2017 37,000 31,500
2018 31,500 22,500
2019 22,500 12,700
2020 12,700 4,000
2021 4,000 -0-
If your loss were larger, you could carry it forward until the year 2036. If you still had an unused 2016 carryforward after the year 2036, you would not be allowed to deduct it.
Example 2. Assume the same facts as in Example 1, except that $4,000 of the NOL is attributable to a casualty loss and this loss qualifies for a 3-year carryback period. You begin using the $4,000 in 2013. As shown in the following chart, $3,000 of this NOL is used in 2013. The remaining $1,000 is carried to 2014 with the $38,000 NOL that you must begin using in 2014.
Carryback/ Unused
Year Carryover Loss
2013 $4,000 $1,000
2014 39,000 37,000
2015 37,000 34,000
2016 (NOL year)
2017 34,000 28,500
2018 28,500 19,500
2019 19,500 9,700
2020 9,700 1,000
2021 1,000 -0-
How To Claim an NOL Deduction
If you have not already carried the NOL to an earlier year, your NOL deduction is the total NOL. If you carried the NOL to an earlier year, your NOL deduction is the carried over NOL minus the NOL amount you used in the earlier year or years.
If you carry more than one NOL to the same year, your NOL deduction is the total of these carrybacks and carryovers.
NOL resulting in no taxable income. If your NOL is more than the taxable income of the year you carry it to (figured before deducting the NOL), you generally will have an NOL carryover to the next year. See How To Figure an NOL Carryover, later, to determine how much NOL you have used and how much you carry to the next year.
Deducting a Carryback
If you carry back your NOL, you can use either Form 1045 or Form 1040X. You can get your refund faster by using Form 1045, but you have a shorter time to file it. You can use Form 1045 to apply an NOL to all carryback years. If you use Form 1040X, you must use a separate Form 1040X for each carryback year to which you apply the NOL.
Estates and trusts that do not file Form 1045 must file an amended Form 1041 (instead of Form 1040X) for each carryback year to which NOLs are applied. Use a copy of the appropriate year's Form 1041, check the "Amended return" box, and follow the Form 1041 instructions for amended returns. Include the NOL deduction with other deductions not subject to the 2% limit (line 15a). Also, see the special procedures for filing an amended return due to an NOL carryback, explained under Form 1040X, later.
Form 1045. You can apply for a quick refund by filing Form 1045. This form results in a tentative adjustment of tax in the carryback year.
If the IRS refunds or credits an amount to you from Form 1045 and later determines that the refund or credit is too much, the IRS may assess and collect the excess immediately.
Generally, you must file Form 1045 on or after the date you file your tax return for the NOL year, but not later than one year after the end of the NOL year. If the last day of the NOL year falls on a Saturday, Sunday, or holiday, the form will be considered timely if postmarked on the next business day. For example, if you are a calendar year taxpayer with a carryback from 2016 to 2014, you must file Form 1045 on or after the date you file your tax return for 2016, but no later than January 2, 2018.
Form 1040X. If you do not file Form 1045, you can file Form 1040X to get a refund of tax because of an NOL carryback. Generally, file Form 1040X for the carryback year within 3 years after the due date, including extensions, for filing the return for the NOL year. For example, if you are a calendar year taxpayer, you must generally file a claim for refund because of an NOL carryback from 2014 by April 16, 2018 (3 years after the due date for the NOL return).
CAUTION: Filing Form 1040X does not extend the carryback period. See When To Use an NOL, earlier.
Attach a computation of your NOL using Form 1045, Schedule A, and, if it applies, your NOL carryover using Form 1045, Schedule B, discussed later.
Refiguring your tax. To refigure your total tax liability for a carryback year, first refigure your adjusted gross income for that year. (On Form 1045, use lines 10 and 11 and the "After carryback" column for the applicable carryback year.) Use your adjusted gross income after applying the NOL deduction to refigure income or deduction items that are based on, or limited to, a percentage of your adjusted gross income. Refigure the following items.
1. The special allowance for passive activity losses from rental real estate activities.
2. Taxable social security and tier 1 railroad retirement benefits.
3. IRA deductions.
4. Excludable savings bond interest.
5. Excludable employer-provided adoption benefits.
6. The student loan interest deduction.
7. The tuition and fees deduction.
If more than one of these items apply, refigure them in the order listed above, using your adjusted gross income after applying the NOL deduction and any previous item. (Enter your NOL deduction on Form 1045, line 10. On line 11, using the "After carryback" column, enter your adjusted gross income refigured after applying the NOL deduction and after refiguring any above items.)
Next, refigure your taxable income. (On Form 1045, use lines 12 through 15 and the "After carryback" column.) Use your refigured adjusted gross income (Form 1045, line 11, using the "After carryback" column) to refigure certain deductions and other items that are based on or limited to a percentage of your adjusted gross income. Refigure the following items.
• The itemized deduction for medical expenses.
• The itemized deduction for qualified mortgage insurance premiums.
• The itemized deduction for casualty losses.
• Miscellaneous itemized deductions subject to the 2% limit.
• The overall limit on itemized deductions (does not apply to carryback years beginning after December 31, 2009 and before January 1, 2013).
• The phaseout of the deduction for exemptions (does not apply to carryback years beginning after December 31, 2009, and before January 1, 2013).
CAUTION: Do not refigure the itemized deduction for charitable contributions.
Finally, use your refigured taxable income (Form 1045, line 15, using the "After carryback" column) to refigure your total tax liability. Refigure your income tax, your alternative minimum tax, and any credits that are based on or limited by your adjusted gross income (AGI), modified adjusted gross income (MAGI), or tax liability. (On Form 1045, use lines 16 through 30, and the "After carryback" column.) The earned income credit, for example, may be affected by changes to adjusted gross income or the amount of tax (or both) and, therefore, must be recomputed. If you become eligible for a credit because of the carryback, complete the form for that specific credit (such as the EIC Worksheet) for that year.
While it is necessary to refigure your income tax, alternative minimum tax, and credits, do not refigure your self-employment tax and additional medicare tax. For information about refiguring your net investment income tax, shared responsibility payment, and credits, see the Instructions for Form 1045.
Deducting a Carryforward
If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on the "Other income" line of Form 1040 or Form 1040NR (line 21 for 2016). Estates and trusts include an NOL deduction on Form 1041 with other deductions not subject to the 2% limit (line 15a for 2016).
You must attach a statement that shows all the important facts about the NOL. Your statement should include a computation showing how you figured the NOL deduction. If you deduct more than one NOL in the same year, your statement must cover each of them.
Change in Marital Status
If you and your spouse were not married to each other in all years involved in figuring NOL carrybacks and carryovers, only the spouse who had the loss can take the NOL deduction. If you file a joint return, the NOL deduction is limited to the income of that spouse.
For example, if your marital status changes because of death or divorce, and in a later year you have an NOL, you can carry back that loss only to the part of the income reported on the joint return (filed with your former spouse) that was related to your taxable income. After you deduct the NOL in the carryback year, the joint rates apply to the resulting taxable income.
Refund limit. If you are not married in the NOL year (or are married to a different spouse), and in the carryback year you were married and filed a joint return, your refund for the overpaid joint tax may be limited. You can claim a refund for the difference between your share of the refigured tax and your contribution toward the tax paid on the joint return. The refund cannot be more than the joint overpayment. Attach a statement showing how you figured your refund.
Figuring your share of a joint tax liability. There are five steps for figuring your share of the refigured joint tax liability.
1. Figure your total tax as though you had filed as married filing separately.
2. Figure your spouse's total tax as though your spouse also had filed as married filing separately.
3. Add the amounts in (1) and (2).
4. Divide the amount in (1) by the amount in (3).
5. Multiply the refigured tax on your joint return by the amount figured in (4). This is your share of the joint tax liability.
Figuring your contribution toward tax paid. Unless you have an agreement or clear evidence of each spouse's contributions toward the payment of the joint tax liability, figure your contribution by adding the tax withheld on your wages and your share of joint estimated tax payments or tax paid with the return. If the original return for the carryback year resulted in an overpayment, reduce your contribution by your share of the tax refund. Figure your share of a joint payment or refund by the same method used in figuring your share of the joint tax liability. Use your taxable income as originally reported on the joint return in steps (1) and (2) above, and substitute the joint payment or refund for the refigured joint tax in step (5).
Change in Filing Status
If you and your spouse were married and filed a joint return for each year involved in figuring NOL carrybacks and carryovers, figure the NOL deduction on a joint return as you would for an individual. However, treat the NOL deduction as a joint NOL.
If you and your spouse were married and filed separate returns for each year involved in figuring NOL carrybacks and carryovers, the spouse who sustained the loss may take the NOL deduction on a separate return.
Special rules apply for figuring the NOL carrybacks and carryovers of married people whose filing status changes for any tax year involved in figuring an NOL carryback or carryover.
Separate to joint return. If you and your spouse file a joint return for a carryback or carryforward year, and were married but filed separate returns for any of the tax years involved in figuring the NOL carryback or carryover, treat the separate carryback or carryover as a joint carryback or carryover.
Joint to separate returns. If you and your spouse file separate returns for a carryback or carryforward year, but filed a joint return for any or all of the tax years involved in figuring the NOL carryover, figure each of your carryovers separately.
Joint return in NOL year. Figure each spouse's share of the joint NOL through the following steps.
1. Figure each spouse's NOL as if he or she filed a separate return. See How To Figure an NOL, earlier. If only one spouse has an NOL, stop here. All of the joint NOL is that spouse's NOL.
2. If both spouses have an NOL, multiply the joint NOL by a fraction, the numerator of which is spouse A's NOL figured in (1) and the denominator of which is the total of the spouses' NOLs figured in (1). The result is spouse A's share of the joint NOL. The rest of the joint NOL is spouse B's share.
Example 1. Mark and Nancy are married and file a joint return for 2016. They have an NOL of $5,000. They carry the NOL back to 2014, a year in which Mark and Nancy filed separate returns. Figured separately, Nancy's 2016 deductions were more than her income, and Mark's income was more than his deductions. Mark does not have any NOL to carry back. Nancy can carry back the entire $5,000 NOL to her 2014 separate return.
Example 2. Assume the same facts as in Example 1, except that both Mark and Nancy had deductions in 2016 that were more than their income. Figured separately, his NOL is $1,800 and her NOL is $3,000. The sum of their separate NOLs ($4,800) is less than their $5,000 joint NOL because his deductions included a $200 net capital loss that is not allowed in figuring his separate NOL. The loss is allowed in figuring their joint NOL because it was offset by Nancy's capital gains. Mark's share of their $5,000 joint NOL is $1,875 ($5,000 × $1,800/$4,800) and Nancy's is $3,125 ($5,000 - $1,875).
Joint return in previous carryback or carryforward year. If only one spouse had an NOL deduction on the previous year's joint return, all of the joint carryover is that spouse's carryover. If both spouses had an NOL deduction (including separate carryovers of a joint NOL, figured as explained in the previous discussion), figure each spouse's share of the joint carryover through the following steps.
1. Figure each spouse's modified taxable income as if he or she filed a separate return. See Modified taxable income under How To Figure an NOL Carryover, later.
2. Multiply the joint modified taxable income you used to figure the joint carryover by a fraction, the numerator of which is spouse A's modified taxable income figured in (1) and the denominator of which is the total of the spouses' modified taxable incomes figured in (1). This is spouse A's share of the joint modified taxable income.
3. Subtract the amount figured in (2) from the joint modified taxable income. This is spouse B's share of the joint modified taxable income.
4. Reduce the amount figured in (3), but not below zero, by spouse B's NOL deduction.
5. Add the amounts figured in (2) and (4).
6. Subtract the amount figured in (5) from spouse A's NOL deduction. This is spouse A's share of the joint carryover. The rest of the joint carryover is spouse B's share.
Example. Sam and Wanda filed a joint return for 2014 and separate returns for 2015 and 2016. In 2016, Sam had an NOL of $18,000 and Wanda had an NOL of $2,000. They choose to carry back both NOLs 2 years to their 2014 joint return and claim a $20,000 NOL deduction.
Their joint modified taxable income (MTI) for 2014 is $15,000, and their joint NOL carryover to 2015 is $5,000 ($20,000 - $15,000). Sam and Wanda each figure their separate MTI for 2014 as if they had filed separate returns. Then they figure their shares of the $5,000 carryover as follows.
Step 1.
Sam's separate MTI $9,000
Wanda's separate MTI + 3,000
--------
Total MTI $12,000
Step 2.
Joint MTI $15,000
Sam's MTI ÷ total MTI
($9,000 ÷ $12,000) × .75
--------
Sam's share of joint MTI $11,250
Step 3.
Joint MTI $15,000
Sam's share of joint MTI - 11,250
--------
Wanda's share of joint MTI $3,750
Step 4.
Wanda's share of joint MTI $3,750
Wanda's NOL deduction - 2,000
--------
Wanda's remaining share $1,750
Step 5.
Sam's share of joint MTI $11,250
Wanda's remaining share + 1,750
--------
Joint MTI to be offset $13,000
Step 6.
Sam's NOL deduction $18,000
Joint MTI to be offset - 13,000
--------
Sam's carryover to 2015 $5,000
========
Joint carryover to 2015 $5,000
Sam's carryover - 5,000
--------
Wanda's carryover to 2015 $-0-
========
Wanda's $2,000 NOL deduction offsets $2,000 of her $3,750 share of the joint modified taxable income and is completely used up. She has no carryover to 2015. Sam's $18,000 NOL deduction offsets all of his $11,250 share of joint modified taxable income and the remaining $1,750 of Wanda's share. His carryover to 2015 is $5,000.
How To Figure an NOL Carryover
If your NOL is more than your taxable income for the year to which you carry it (figured before deducting the NOL), you may have an NOL carryover. You must make certain modifications to your taxable income to determine how much NOL you will use up in that year and how much you can carry over to the next tax year. Your carryover is the excess of your NOL deduction over your modified taxable income for the carryback or carryforward year. If your NOL deduction includes more than one NOL, apply the NOLs against your modified taxable income in the same order in which you incurred them, starting with the earliest.
Modified taxable income. Your modified taxable income is your taxable income figured with the following changes.
1. You cannot claim an NOL deduction for the NOL carryover you are figuring or for any later NOL.
2. You cannot claim a deduction for capital losses in excess of your capital gains. Also, you must increase your taxable income by the amount of any section 1202 exclusion.
3. You cannot claim the domestic production activities deduction.
4. You cannot claim a deduction for your exemptions for yourself, your spouse, or dependents.
5. You must figure any item affected by the amount of your adjusted gross income after making the changes in (1), (2), and (3), above, and certain other changes to your adjusted gross income that result from (1), (2), and (3). This includes income and deduction items used to figure adjusted gross income (for example, IRA deductions), as well as certain itemized deductions. To figure a charitable contribution deduction, do not include deductions for NOL carrybacks in the change in (1) but do include deductions for NOL carryforwards from tax years before the NOL year.
Your taxable income as modified cannot be less than zero.
Form 1045, Schedule B. You can use Form 1045, Schedule B, to figure your modified taxable income for carryback years and your carryover from each of those years. Do not use Form 1045, Schedule B, for a carryforward year. If your 2016 return includes an NOL deduction from an NOL year before 2016 that reduced your taxable income to zero (to less than zero, if an estate or trust), see NOL Carryover From 2016 to 2017, later.
NOL Carryover From 2016 to 2017
If you had an NOL deduction carried forward from a year prior to 2016 that resulted in your having taxable income on your 2016 return of zero (of less than zero, if an estate or trust), complete Table 1, Worksheet for NOL Carryover From 2016 to 2017, on the following pages. It will help you figure your NOL to carry to 2017. Keep the worksheet for your records.
Worksheet Instructions
At the top of the worksheet, enter the NOL year for which you are figuring the carryover.
More than one NOL. If your 2016 NOL deduction includes amounts for more than one loss year, complete this worksheet only for one loss year. To determine which year, start with your earliest NOL and subtract each NOL separately from your taxable income figured without the NOL deduction. Complete this worksheet for the earliest NOL that results in your having taxable income below zero. Your NOL carryover to 2017 is the total of the amount on line 10 of the worksheet and all later NOL amounts.
Example. Your taxable income for 2016 is $5,000 without your $9,000 NOL deduction. Your NOL deduction includes a $2,000 carryover from 2014 and a $7,000 carryover from 2015. Subtract your 2014 NOL of $2,000 from $5,000. This gives you taxable income of $3,000. Your 2014 NOL is now completely used up. Subtract your $7,000 2015 NOL from $3,000. This gives you taxable income of ($4,000). You now complete the worksheet for your 2015 NOL. Your NOL carryover to 2017 is the unused part of your 2015 NOL from line 10 of the worksheet.
Line 2. Treat your NOL deduction for the NOL year entered at the top of the worksheet and later years as a positive amount. Add it to your negative taxable income (figured without the NOL deduction). Enter the result on line 2.
Line 6. You must refigure the following income and deductions based on adjusted gross income.
1. The special allowance for passive activity losses from rental real estate activities.
2. Taxable social security and tier 1 railroad retirement benefits.
3. IRA deductions.
4. Excludable savings bond interest.
5. Excludable employer-provided adoption benefits.
6. The student loan interest deduction.
7. The tuition and fees deduction.
If none of these items apply to you, enter zero on line 6. Otherwise, increase your adjusted gross income by the total of lines 3 through 5 and your NOL deduction for the NOL year entered at the top of the worksheet and later years. Using this increased adjusted gross income, refigure the items that apply, in the order listed above. Your adjustment for each item is the difference between the refigured amount and the amount included on your return. Combine the adjustments for previous items with your adjusted gross income before refiguring the next item. Keep a record of your computations.
Enter your total adjustments for the above items on line 6.
Line 7. Enter zero if you claimed the standard deduction and the amounts on lines 3 through 5 are zero. Otherwise, use lines 11 through 33 of the worksheet to figure the amount to enter on this line. Complete only those sections that apply to you.
Estates and trusts. Enter zero on line 7 if you did not claim any miscellaneous deductions on Form 1041, line 15c, or a casualty or theft loss. Otherwise, refigure these deductions by substituting modified adjusted gross income (see below) for adjusted gross income. Subtract the recomputed deductions from those claimed on the return. Enter the result on line 7.
Modified adjusted gross income. To refigure miscellaneous itemized deductions of an estate or trust (Form 1041, line 15c), modified adjusted gross income is the total of the following amounts.
• The adjusted gross income on the return.
• The amounts from lines 3 through 5 of the worksheet.
• The exemption amount from Form 1041, line 20.
• The NOL deduction for the NOL year entered at the top of the worksheet and for later years.
To refigure the casualty and theft loss deduction of an estate or trust, modified adjusted gross income is the total of the following amounts.
• The adjusted gross income amount you used to figure the deduction claimed on the return.
• The amounts from lines 3 through 5 of the worksheet.
• The NOL deduction for the NOL year entered at the top of the worksheet and for later years.
Line 11. Treat your NOL deduction for the NOL year entered at the top of the worksheet and for later years as a positive amount. Add it to your adjusted gross income. Enter the result on line 11.
Line 20. Is your modified adjusted gross income from line 13 of this worksheet more than $100,000 ($50,000 if married filing separately)?
[ ] Yes. Your deduction is limited. Refigure your deduction using the Mortgage Insurance Premiums Deduction Worksheet in the 2015 Instructions for Form 1045. On line 2 of the Mortgage Insurance Premiums Deduction Worksheet, enter the amount from line 13 of this worksheet.
[ ] No. Your deduction is not limited. Enter the amount from line 19 on line 20 and enter -0- on line 21.
Line 23. If you had a contributions carryover from 2015 to 2016 and your NOL deduction includes an amount from an NOL year before 2015, you may have to reduce your contributions carryover. Reduce the contributions carryover by the amount of any adjustment you made to your 2015 charitable contributions deduction when figuring your NOL carryover to 2016. Use the reduced contributions carryover to figure the amount to enter on line 23.
Table 1. Worksheet for NOL Carryover From 2016 to 2017 (For an NOL Year Before 2016)*
For Use by Individuals, Estates, and Trusts (Keep for your records.)
See the instructions under NOL Carryover From 2016 to 2017.
----------------------------------------------------------------------
NOL YEAR: _________
USE YOUR 2016 FORM 1040, FORM 1040NR (OR FORM 1041) TO COMPLETE THIS
WORKSHEET:
1. Enter as a positive number your NOL deduction for
the NOL year entered above from line 21 (Form 1040
or Form 1040NR) or line 15a (Form 1041) ______
2. Enter your taxable income without the NOL
deduction for 2016 (see instructions) ______
3. Enter as a positive number any net capital loss
deduction ______
4. Enter as a positive number any gain excluded on
the sale or exchange of qualified small business ______
5. Enter the amount of any domestic production
activities deduction ______
6. Enter any adjustments to your adjusted gross
income (see instructions) ______
7. Enter any adjustments to your itemized deductions
from line 33 below (see instructions) ______
8. Enter your deduction for exemptions from line 42
(Form 1040), line 40 (Form 1040NR), or line 20
(Form 1041) ______
9. Modified taxable income. Combine lines 2 through 8.
Enter the result (but not less than zero) ______
10. NOL carryover to 2017. Subtract line 9 from line 1.
Enter the result (but not less than zero) here and
on the "other income" line of Form 1040 or
Form 1040NR (or the line on Form 1041 for deductions
NOT subject to the 2% floor) in 2017 ______
ADJUSTMENTS TO ITEMIZED DEDUCTIONS (INDIVIDUALS ONLY):
11. Enter your adjusted gross income without the NOL
deduction for the NOL year entered above or later
years (see instructions) ______
12. Combine lines 3, 4, 5, and 6 above ______
13. Modified adjusted gross income. Combine lines 11
and 12 above ______
ADJUSTMENT TO MEDICAL EXPENSES:
14. Enter your medical expenses from
Schedule A (Form 1040), line 4 ______
15. Enter your medical expenses from
Schedule A (Form 1040), line 1 ______
16. Multiply line 13 above by 10% (0.10). But if
either you or your spouse was born before January
2, 1952, multiply line 13 by 7.5% (0.075) ______
17. Subtract line 16 from line 15. Enter the result
(but not less than zero) ______
18. Subtract line 17 from line 14 ______
ADJUSTMENT TO MORTGAGE INSURANCE PREMIUMS:
19. Enter your mortgage insurance premiums deduction
from Schedule A (Form 1040), line 13 ______
20. Refigure your mortgage insurance premiums
deduction using line 13 above as your adjusted
gross income (see instructions) ______
21. Subtract line 20 from line 19 ______
ADJUSTMENT TO CHARITABLE CONTRIBUTIONS:
22. Enter your charitable contributions deduction from
Schedule A (Form 1040), line 19, or
Schedule A (Form 1040NR), line 5 ______
23. Refigure your charitable contributions deduction
using line 13 above as your adjusted gross income
(see instructions) ______
24. Subtract line 23 from line 22 ______
ADJUSTMENT TO CASUALTY AND THEFT LOSSES:
25. Enter your casualty and theft losses from
Form 4684, line 18 ______
26. Multiply line 13 above by 10% (0.10) ______
27. Subtract line 26 from line 25. Enter the result
(but not less than zero) ______
ADJUSTMENT TO MISCELLANEOUS DEDUCTIONS:
28. Enter your miscellaneous deductions from
Schedule A (Form 1040), line 27, or
Schedule A (Form 1040NR), line 13 ______
29. Enter your miscellaneous deductions from
Schedule A (Form 1040), line 24, or
Schedule A (Form 1040NR), line 10 ______
30. Multiply line 13 above by 2% (0.02) ______
31. Subtract line 30 from line 29. Enter the result
(but not less than zero) ______
32. Subtract line 31 from line 28 ______
TENTATIVE TOTAL ADJUSTMENT:
33. Combine lines 18, 21, 24, 27, and 32, and enter the
result here. If line 13 above is $311,300 or less if
married filing jointly or qualifying widow(er),
$285,350 or less if head of household, $259,400 or
less if single, or $155,650 or less if married filing
separately, also enter the result on line 7 above and
stop here. Otherwise, go to line 34 ______
ADJUSTMENT TO OVERALL ITEMIZED LIMIT:
34. Enter the amount from Schedule A (Form 1040),
line 29, or Schedule A (Form 1040NR), line 15 ______
35. Add lines 17, 20, 23, 26, and 31, and the amounts
on Schedule A (Form 1040), lines 9, 10, 11, 12,
14, and 28, or the amounts from
Schedule A (Form 1040NR), lines 1 and 14 ______
36. Add lines 17 and 27, the amount on
Schedule A (Form 1040), line 14, and any gambling
and casualty or theft losses included on
Schedule A (Form 1040), line 28, or
Schedule A (Form 1040NR), line 14 ______
37. Subtract line 36 from line 35. If the result is
zero, enter the amount from line 33 on line 7
above and stop here. Otherwise, go to line 38 ______
38. Multiply line 37 by 80% (0.80) ______
39. Subtract $311,300 if married filing jointly or
qualifying widow(er), $285,350 if head of
household, $259,400 if single, or $155,650 if
married filing separately from the amount on
line 13 ______
40. Multiply line 39 by 3% (0.03) ______
41. Enter the smaller of line 38 or line 40 ______
42. Subtract line 41 from line 35. Enter the result
(but not less than your standard deduction amount) ______
43. Subtract line 42 from line 34. Enter the result
here and on line 7 ______
----------------------------------------------------------------------
* Note: If you choose to waive the carryback period, and instead you
choose to only carry your 2016 NOL forward, use Schedule A, Form 1045,
to compute your 2016 NOL that will be carried over to 2017. Report
your 2016 NOL from line 25, Schedule A, Form 1045, on the "other
income" line of your 2017 Form 1040 or Form 1040NR, or the line on
Form 1041 for deductions NOT subject to the 2% floor in 2017.
======================================================================
How To Get Tax Help
If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.
Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.
You can go to IRS.gov and click on the Filing tab to see your options for preparing and filing your return which include the following.
• Free File. Go to IRS.gov/freefile. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free.
• VITA. Go to IRS.gov/vita, download the free IRS2Go app, or call 1-800-906-9887 to find the nearest VITA location for free tax preparation.
• TCE. Go to IRS.gov/tce, download the free IRS2Go app, or call 1-888-227-7669 to find the nearest TCE location for free tax preparation.
Getting answers to your tax law questions. On IRS.gov get answers to your tax questions anytime, anywhere.
• Go to IRS.gov/help or IRS.gov/letushelp pages for a variety of tools that will help you get answers to some of the most common tax questions.
• Go to IRS.gov/ita for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.
• Go to IRS.gov/pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2016 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features.
• You may also be able to access tax law information in your electronic filing software.
Getting tax forms and publications. Go to IRS.gov/forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/orderforms to place an order and have forms mailed to you within 10 business days.
Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.
Delayed refund for returns claiming certain credits. Due to changes in the law, the IRS can't issue refunds before February 15, 2017, for returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.
Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:
• Order your transcript by calling 1-800-908-9946.
• Mail Form 4506-T or Form 4506T-EZ (both available on IRS.gov).
Using online tools to help prepare your return. Go to IRS.gov/tools for the following.
• The Earned Income Tax Credit Assistant (IRS.gov/eic) determines if you are eligible for the EIC.
• The Online EIN Application (IRS.gov/ein) helps you get an employer identification number.
• The IRS Withholding Calculator (IRS.gov/w4app) estimates the amount you should have withheld from your paycheck for federal income tax purposes.
• The First Time Homebuyer Credit Account Look-up (IRS.gov/homebuyer) tool provides information on your repayments and account balance.
• The Sales Tax Deduction Calculator (IRS.gov/salestax) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040), choose not to claim state and local income taxes, and you didn't save your receipts showing the sales tax you paid.
Resolving tax-related identity theft issues.
• The IRS doesn't initiate contact with taxpayers by email or telephone to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
• Go to IRS.gov/idprotection for information and videos.
• If your SSN has been lost or stolen or you suspect you are a victim of tax-related identity theft, visit IRS.gov/id to learn what steps you should take.
Checking on the status of your refund.
• Go to IRS.gov/refunds.
• Due to changes in the law, the IRS can't issue refunds before February 15, 2017, for returns that claim the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits.
• Download the official IRS2Go app to your mobile device to check your refund status.
• Call the automated refund hotline at 1-800-829-1954.
Making a tax payment. The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/payments to make a payment using any of the following options.
• IRS Direct Pay: Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.
• Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device.
• Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax preparation software or through a tax professional.
• Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.
• Check or money order: Mail your payment to the address listed on the notice or instructions.
• Cash: If cash is your only option, you may be able to pay your taxes at a participating retail store.
What if I can't pay now? Go to IRS.gov/payments for more information about your options.
• Apply for an online payment agreement (IRS.gov/opa) to meet your tax obligation in monthly installments if you can't pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.
• Use the Offer in Compromise Pre-Qualifier (IRS.gov/oic) to see if you can settle your tax debt for less than the full amount you owe.
Checking the status of an amended return. Go to IRS.gov and click on Where's My Amended Return? (IRS.gov/wmar) under the "Tools" bar to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it show up in our system and processing it can take up to 16 weeks.
Understanding an IRS notice or letter. Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.
Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can't be handled online or by phone. All TACs now provide service by appointment so you'll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on "Local Offices."
Watching IRS videos. The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.
Getting tax information in other languages. For taxpayers whose native language isn't English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.
• Spanish (IRS.gov/spanish).
• Chinese (IRS.gov/chinese).
• Vietnamese (IRS.gov/vietnamese).
• Korean (IRS.gov/korean).
• Russian (IRS.gov/russian).
The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.
The Taxpayer Advocate Service Is Here To Help You
What is the Taxpayer Advocate Service?
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
What Can the Taxpayer Advocate Service Do For You?
We can help you resolve problems that you can't resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:
• Your problem is causing financial difficulty for you, your family, or your business,
• You face (or your business is facing) an immediate threat of adverse action, or
• You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised.
How Can You Reach Us?
We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate's number is in your local directory and at taxpayeradvocate.irs.gov. You can also call us at 1-877-777-4778.
How Can You Learn About Your Taxpayer Rights?
The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.
How Else Does the Taxpayer Advocate Service Help Taxpayers?
TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/sams.
Low Income Taxpayer Clinics
Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List.
- Jurisdictions
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