Net Operating Losses
Chapter 2 pp. 39 - 70
2015 National Income
Tax Workbook™
AMAZINGLY SIMPLE HOME
REMEDIES (That Really Work!)
 1. AVOID CUTTING YOURSELF WHEN SLICING VEGETABLES BY
GETTING SOMEONE ELSE TO HOLD THE VEGETABLES WHILE YOU
SLICE.
 2. AVOID ARGUMENTS ABOUT LIFTING THE TOILET SEAT BY USING
THE SINK.
 3. FOR HIGH BLOOD PRESSURE SUFFERERS ~ REDUCE
PRESSURE BY CUTTING YOURSELF AND BLEEDING. REMEMBER
TO USE A TIMER.
 4. A MOUSE TRAP PLACED ON TOP OF YOUR ALARM CLOCK WILL
PREVENT YOU FROM GOING BACK TO SLEEP AFTER HITTING THE
SNOOZE BUTTON.
 5. IF YOU HAVE A BAD COUGH, TAKE LAXATIVES. THEN YOU'LL BE
AFRAID TO COUGH.
 6. YOU ONLY NEED TWO TOOLS IN LIFE. IF IT DOESN'T MOVE AND
SHOULD, USE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE
DUCT TAPE.
 7. IF YOU CAN'T FIX IT WITH A HAMMER, YOU'VE GOT AN
ELECTRICAL PROBLEM.
Net Operating Losses
Chapter 2 pp. 39 - 70
2015 National Income
Tax Workbook™
Net Operating Losses
Page 39
 Steps for NOL Deduction.
 NOL Carried between Joint and
Separate returns
 Special issues in NOL calculations
 Making optimal use of an NOL
deduction.
 Appendix–Helpful NOL Worksheets
Net Operating Losses
Why understand NOL Rules and Comps?
 There are decisions to be made that can
impact the amount the client pays in taxes.
▪ Do we carryback or forward?
▪ Is it better to claim itemized deductions
in loss year or delay payment to a CO
year? What’s the difference?
▪ Is it better to try to move income into or
out of the loss year to or from a CO year?
23 VAC 10-110-84
Net operating loss carrybacks and
carryovers.
 Generally. For Virginia purposes a net
operating loss deduction is allowed
only to the extent that it is allowed in
computing federal adjusted gross
income.
 Therefore, it must be carried back or
carried forward to the same year as
for federal income tax purposes
Where to file NOL in VA
 In the oval on the front of the return if the
amended return is the result of a net
operating loss (NOL) carryback.
 General instructions for computing the NOL
can be obtained from the website at
www.policylibrary.tax.virginia.gov/OTP/policy.nsf.
 Select 23VAC10-110-80 and 23VAC10-110-81
located in Chapter 110, Individual Income
Tax, Virginia Tax Administrative Code.
Net Operating Losses
Page 39
 NOL Deductions can allow carrybacks of 2,
3, 5,or 10 years and carryforwards up to 20
years.
 Idea simple but Calculations complex.
 IRC Section 172 removes some tax benefits
before an NOL deduction is calculated.
 Income and deductions are modified in all
affected years.
Net Operating Losses
Page 40
 Deductions for the NOL year are
modified to determine the NOL
that can be carried to other
years.
 Taxable income is modified in
years to which the loss is carried
to determine how much of the
NOL is absorbed in each year.
Net Operating Losses - Individual Taxpayers
Page 40
Four Steps to Compute NOL
Deductions for an Individual:
1. Determine eligibility
2. Compute the NOL
3. Distribute NOL to carryback &
carryfoward years.
4. Re-Calculate taxes in carryback
and carryforward years.
Net Operating Losses - Individual Taxpayers
Page 40
Step 1 - Determine Eligibility:
 Individuals and C Corporations claim
their own NOLs
 Partnerships, S Corps and LLCs taxed as
PS or S Corp:
▪ Cannot claim their NOL deduction.
▪ Partner, SH or member claim their share
of the NOL deduction on their return.
Net Operating Losses - Individual Taxpayers
Page 40
Four steps to Compute NOL
deductions for an Individual:
1. Determine eligibility
2. Compute the NOL
3. Distribute NOL to carryback &
carryfoward years.
4. Calculate taxes in carryback and
carryforward years.
Net Operating Losses - Individual Taxpayers
Pages 40 - 41
Step 2 – Compute the NOL:
 Negative taxable income is modified by
removing deductions that are not allowed in
computing the NOL.
▪ Generally, only business losses are in an
NOL & carried to another year.
▪ Items with their own carryover rules are
excluded from the NOL.
(Ex.: Capital Losses)
Net Operating Losses - Individual Taxpayers
Page 41
Exclude from NOL / Add back to Negative Taxable Income:
1.
2.
3.
4.
5.
6.
Dependents & personal exemptions.
Nonbusiness deductions in excess of
nonbusiness income
Capital losses in excess of capital gains.
50% exclusion of gain from Sec 1202 stock.
An NOL deduction carried from another year.
IRC domestic Production activities deduction.
If sum of the above exceed negative taxable
income, there is no NOL for the year.
Net Operating Losses - Individual Taxpayers
Page 41
 Paige’s taxable Income for 2009 is
 Nonbusiness deductions above
nonbusiness income
 NOL
Ex. 2.1
($10,000)
6,000
($4,000)
 If non-business income had equaled or exceeded
$10,000 there would be no NOL.
 Business income & deductions arise from:
▪ A trade or business, wages and (an exception
for) casualty & theft losses even if personal.
Observation
p. 41
For NOL purposes:
 Taxpayer prefers income and
gain to be nonbusiness
 Taxpayer prefers deductions
and losses to be business
Net Operating Losses - Individual Taxpayers
Pages 41 - 42
T.I.
Bus Loss
Ex 2.2
Add Back
$(10,000)
NOL
$(10,000)
Wage Inc
6,000
6,000
Invest Inc
500
500
AGI
$( 3,500)
$( 3,500)
Pers Exe.
( 4,000)
$ 4,000
Stand Ded
( 6,300)
$ 5,800
Tax. Inc. =
$(13,800)
* Keeps $500
Of Stand Ded
-0(
500)*
$ 8,850 $( 4,000) = NOL
attributable to Invest Inc
Net Operating Losses –
Other Ways to Look At It
Page 42
Observation
TI
Bus Loss
Add Back
$(10,000)
NOL
$(10,000) $(10,000)
Wage Inc
6,000
6,000
Invest Inc
500
500
AGI
Or NOL
$( 3,500)
6,000
--
$( 3,500)
Pers Exe.
( 4,000)
$ 4,000
Stand Ded
( 6,300)
$ 5,800
Tax. Inc. =
$(13,800)
NOL =
-0(
500)
________
$( 4,000) $( 4,000)
Net Operating Losses - Individual Taxpayers
Page 42
 Farm & Fishing Income Averaging ▪ See pages 371 – 375 of the 2009 text.
 Suspended losses from passive activities,
at-risk rules, basis limits, contributions:
▪ Do not impact NOL computation in years
suspended because not deducted in
these years.
▪ Do go into NOL computation in year they
are allowed.
Net Operating Losses - Individual Taxpayers
Page 42
 Form 1045 – Application for Tentative Refund
 Schedule A – A worksheet for computing NOL for
Form 1045 or an amended return.
 Appendix to this Chapter, pages 65 – 70, include
help to complete Form 1045 via 4 worksheets:
▪ #1 – Nonbusiness and business capital losses
▪ #2 – Nonbusiness and business capital gains
▪ #3 – Nonbusiness deductions
▪ #4 – Nonbusiness income
Net Operating Losses - Individual Taxpayers
Pages 42 - 43
Four steps to Compute NOL
deductions for an Individual:
1. Determine eligibility
2. Compute the NOL
3. Distribute NOL to carryback &
carryfoward years.
4. Calculate taxes in carryback and
carryforward years.
Net Operating Losses - Individual Taxpayers
Pages 42 - 43
Step 3 -- Distribute the NOL
 Different carryback periods based on source of NOL.
 NOL absorbed in carryover year is modified taxable income
NOT taxable income in carryover year.
▪ Thus do not get full benefit of the NOL carryover.
 Can elect to forgo carryback for a carryforward:
▪ Election on original return for NOL year or
▪ Amended return for NOL year filed within 6-months of
original return due date.
Net Operating Losses - Individual Taxpayers
Pages 43 - 44
 General Rule – Carryback 2 years and then
forward for 20 years.
▪ Any loss not used up is lost.
 Exceptions – NOL from Casualty, Theft & Small
Business Disaster Losses have 3-Year carryback
and Farm losses have a 5-year carryback.
 Must allocate if have 2 and 3 year carryback
losses – As though have two separate NOLs
 IRS does not provide rules on how to allocate
between NOLs with different carrybacks but IRC
172(b)9(1)E(ii) does provide guidance.
Net Operating Losses - Individual Taxpayers
Page 44
EX. 2.3
 Cherry had a $700 theft loss in 2015.
 She claimed a $6,300 Standard Deduction.
 Her Itemized Deductions were $4,500
(excluding the theft loss)
 She had a $10,000 business loss.
 Her only investment income was $500.
What’s her NOL?
Can she carryback her theft loss?
Net Operating Losses - Individual Taxpayers
Page 44
Bus Loss
EX 2.3
($10,000)
Invest Inc
500
AGI
($ 9,500)
Exemption
(
4,000)
Stand. Ded.
(
6,300)
Taxable Inc
($19,800)
Add: Exem
4,000
Stand. Ded.
5,800
NOL
($10,000)
($10,000)
= $6,300 SD – 500 Inv Inc
($10,000)
No theft loss carryover since it did not affect her NOL
and Carryover period is 2-years….NOT 3..
Net Operating Losses - Individual Taxpayers
Pages 44 - 45
EX 2.4
 Suppose Cherry’s theft loss had been
$50,000 instead of $700?
 She would itemize because of that theft
loss.
Now what’s her NOL?
Can she carryback her theft loss?
How much of her NOL has a 2 yr CB?
How much of her NOL has a 3 yr CB?
Net Operating Losses - Individual Taxpayers
Pages 44 - 45
Bus Loss
Invest Inc
AGI
Exemption
EX 2.4
($10,000)
500
($ 9,500)
( 4, 000)
Stand. Ded. (
6,300) Casualty $50,000-$10010% AGI
Other Itemized Ded
Taxable Inc ($19,800)
Add: Exem
4,000
Stand. Ded.
6,300 Item Ded $4,500*- $500
NOL
($10,000)
($10,000)
500
($ 9,500)
( 4,000)
( 49,900)
( 4,500)*
($67,900)
4,000
4,000
($59,900)
Net Operating Losses - Individual Taxpayers
Pages 44 - 45
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
EX 2.4
Bus Inc
($10,000)
Invest Income
500
AGI
($ 9,500)
Personal Exemption
( 4,000)
Deductible Casualty
( 49,900)
$49,900*
Other Itemized Deducts ( 4,500)*
Taxable Income
($67,900)
Add Back: Exemp
4,000
Item Deds – Invest Inc
4,000
NOL
($59,900)
( 59,900)
NOL over Casualty
– 2 year carryback = $10,000
$49,900* Casualty Loss NOL - 3 year carryback
Net Operating Losses - Individual Taxpayers
Page 45
Another Exception to 2 Year Carryback
Small Business Disaster Losses – 3 Year Carryback
 These are losses from “Federally Declared
Disasters”.
 Must allocate NOL between 2 year and 3 year CBs
if have both types.
 Three possible methods of NOL allocation:
▪ Allocate to 3-year CB 1st
▪ Allocate to 2-year CB 1st
▪ Allocate based on pro rata basis
Net Operating Losses - Individual Taxpayers
Pages 45 - 46
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

Ex 2.5
Doug’s store destroyed by flood .
Area declared a “Federal Disaster Area”
Doug suffered a $70,000 loss from being closed
Doug’s wife earned $20,000 teaching
Doug’s wife suffered a $30,000 loss from her
internet business
How much of the NOLs can be carried back 2 years?
How much of the NOLs can be carried back 3 years?
Net Operating Losses - Individual Taxpayers
Pages 45 - 46
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

Ex 2.5
Wages
$20,000
Taxable interest
5,500
Doug’s store loss
(70,000)
3-Year CB
Wife’s business loss
(30,000)
2-Year CB
AGI
$ ( 74,500)
Standard Deduction
( 12,600)
Personal exemption
( 8,000)
Taxable income
$ (95,100)
Add back: Stand. Ded.
5,900 = 12,600 – 5,500 Inv Inc
Pers. Exem.
8,000
NOL
$ (80,000)
3 ways to allocate NOL between 2 and 3 year CB periods
Net Operating Losses - Individual Taxpayers
Pages 45 - 46




Ex 2.5 and Fig 2.5
$ 70,000 3-Year CB for Federal Disaster Area
$ 30,000 2-Year CB from a regular business loss
$100,000 total in losses
But, due to adjustments NOL is only $80,000

Method
3-Year CB
 1st allocate to $70,000
$70,000
 1st allocate to $30,000
$50,000
 Pro-rata allocation:
70,000 / 100,000 x 80,000 = $56,000
2-Year CB
$10,000
$30,000
$24,000
Net Operating Losses - Individual Taxpayers
Page 46
Ex 2.6
Priority of CBs and CFs -- 2-year CBs are used first
If allocation Method # 1 were used:
2012
2013
1st
2nd
1st
2014
2015 2016
(70,000)
(10,000)
2nd
1st
2nd
1st
 3 Yr NOL CB
 2 Yr NOL CB
 (70,000)
 (10,000)
If elect to forgo CB the election to forego a CB
applies to both CBs.
Net Operating Losses - Individual Taxpayers
Pages 46 - 47
Another Exception to 2 Year Carryback
Farming Losses including nurseries, sod farms, etc
– 5 Year Carryback & 20 Year Carryforward
 Farming Loss is defined as lesser of:
▪ NOL from income and deductions from farming
▪ Total NOL
 NOLs are 1st allocated to farming losses and then
to other losses
Net Operating Losses - Individual Taxpayers
Page 47
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
EX 2.7, Fig. 2.6
Wages
$20,000
Taxable interest
5,500 ($ 5,500)
Farming bus. loss - 5-year CB ( 70,000)
($70,000)
Truck bus. loss (Fed Disaster) ( 30,000)
AGI
($ 74,500)
Standard Deduction
( 12,600) 12,600
Personal Exemption
( 8,000)
Taxable income
($ 95,100)
Add Back: Excess Stand. Ded.
$12,600 – 5,500 (non-bus inc)
7,100 $ 7,100

Pers. Exemp.
8,000
 Total NOL
$( 80,000)
($80,000)
 Remaining NOL – 3-year CB
($10,000)
Net Operating Losses - Individual Taxpayers
Page 47
EX 2.7
Q&A # 1:
What is the NOL computed using only
Sandy’s farm income?
Q&A # 2:
What is the NOL if Rocky’s wages were
$35,000
instead of $20,000?
Net Operating Losses - Individual Taxpayers
Page 47
EX 2.7, Q1
Q&A # 1:
Sandy’s NOL from farming only is $70,000 and has a
5-year CB since from farming.
The $10,000 NOL from a small business disaster
loss has a 3-year CB.
 Farming NOL = $70,000
 Total NOL
= $80,000
 Remaining NOL = $10,000
5-year CB Farming
3-year CB Federal
Disaster
Area
Net Operating Losses - Individual Taxpayers
Page 47
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
EX 2.7, Q2
Wages changed to $35,000
Taxable interest
5,500 ($ 5,500)
Farming business loss
( 70,000)
Truck business loss (FDA) ( 30,000)
AGI
$( 59,500)
Standard Deduction
( 12,600)
12,600
Personal Exemption
( 8,000)
Taxable income
$( 80,100)
Add Back: Stand. Ded.
7,100
$ 7,100
Pers. Exemp.
8,000
Total NOL
$( 65,000)
Continued……..
($70,000)
($65,000)
Net Operating Losses - Individual Taxpayers
Pages 47 - 48
EX 2.7, Q2
 Farming NOL = $70,000 But limited to total NOL
 Total NOL
= $65,000 5-year CB Farming
 Remaining NOL= $
-03-year CB Fed
Disaster
Area
 If waive 5-year farming CB it reverts to a 2-year
CB
Net Operating Losses - Individual Taxpayers
Page 48
Other Exceptions to 2 Year Carryback
 Specified Liability Loss – 10-year CB
▪ NOL attributable to Product Liability loss or
Reclamation of land
Decommissioning of nuclear power plant
Dismantling a drilling platform
Remediation of environmental contamination
Payment under worker compensation act
 Certain Disaster AREA losses – 5-year CB
▪ Qualified Disaster Loss – 2008 and 2009
▪ Qualified GO Zone; Kansas Area; Midwestern Area
 If elect to waive 10-year CB the CB is 2-years.
Net Operating Losses - Individual Taxpayers
Page 48
 Election to forgo any carryback requires
attaching a statement to the original return for
the loss year.
 Election must be made on:
▪ Original return including extensions or
▪ Amended return filed within 6-months of
unextended due date.
 If no election is made the NOL is absorbed in
the CB years even if no NOL is carried to those
years….See Ex 2.9
Net Operating Losses - Individual Taxpayers
Page 49
 NOL Absorption -- NOL Minus Modified Taxable Income in
each intervening year…..Use Schedule B, Form 1045
 Modified taxable income =
▪ Taxable Income in the Intervening Year
▪ Less:
• Capital Losses deducted in excess of capital gains
• Partial exclusion on gain on qualified small
business stock
• Personal & dependent exemptions
• Domestic production activities deduction
Net Operating Losses - Individual Taxpayers
Page 49
 Adjustments to compute Modified Taxable Income change
AGI which also affects:
▪ Special allowance for passive losses from rental
property
▪ Taxable Social Security benefits
▪ IRA Deductions
▪ Excludible savings bond interest
▪ Exclusion amounts rec’d under employer adoption
program
▪ Student loan interest
▪ Tuition and fees deduction
▪ Itemized Deductions impacted by a change in AGI.
Enter these adjustments on Line 6, Schedule B Form 1045
Net Operating Losses - Individual Taxpayers
Page 50
Four steps to Compute NOL
deductions for an Individual:
1. Determine eligibility
2. Compute the NOL
3. Distribute NOL to carryback &
carryfoward years.
4. Calculate taxes in carryback and
carryforward years.
Net Operating Losses - Individual Taxpayers
Page 50
Step 4 – Calculate Taxes in CB and CF Years:
 An NOL carryback:
▪ Reduces AGI and Taxable Income which can
affect itemized deductions and exemptions.
▪ Changes are reported on Form 1045 or an
amended return.
 An NOL carryfoward:
▪ Shown as negative income on Line 21, Form
1040 (“Other Income”)
Net Operating Losses - Individual Taxpayers
Page 50
 Deadline for Form 1045
▪ Before end of tax year following year of NOL.
▪ Not before return for NOL year is filed.
Example -- Form 1045 for 2015 can be filed
after 2015 return is filed and before
the end of 2016.
 Deadline for Form 1040X
▪ 3-years from due date of loss year return.
Example -- Form 1040X for 2015 must be filed
by 4/15/2019 unless there was an
extension to file the 2015 return.
Net Operating Losses - Individual Taxpayers
Pages 50 - 51
 Change in filing status requires allocations.
 Allocation of a Joint NOL:
▪ Allocate to each spouse their share of
NOL as if a separate return had been filed.
▪ Computation = Each spouse’s NOL on a
separate return divided by total of NOL’s
both spouses would have had on separate
returns is allocated to each spouse.
▪ If only one spouse had an NOL all of the
joint return NOL is allocated to that
spouse.
Net Operating Losses - Individual Taxpayers
Page 51
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

Ex 2.10
Joint NOL NOLs if filed Separate
Total Joint NOL $10,000
Husband’s NOL
$ 9,000
Wife’s NOL
3,000
Total NOL if filed separately
$12,000
Allocation:
Husband’s NOL = $10,000 x 9,000/12,000 = $ 7,500.
Wife’s NOL
= $10,000 x 3,000/12,000 = $ 2,500.
Total of Allocated Joint NOL
$10,000
Net Operating Losses - Individual Taxpayers
Page 51
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
Ex 2.11
Joint NOL NOLs if filed Separate
Total Joint NOL $10,000
Husband’s NOL
$ 9,000
Wife’s NOL
3,000
Total NOL if filed separately
$12,000
Allocation:
Husband’s NOL = $10,000 x 9,000/12,000 = $ 7,500.
Wife’s NOL
= $10,000 x 3,000/12,000 = $ 2,500.
Total of Allocated Joint NOL
$10,000
But, now let’s suppose only one of the spouses
filing a joint return had an NOL……….
Net Operating Losses – Only One with NOL
Page 51
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
Ex 2.11
Joint NOL NOLs if filed Separate
Total Joint NOL $4,000
Husband’s NOL
$ 7,000
Wife’s NOL
-0Total NOL if filed separately
$ 7,000
Allocation:
Husband’s NOL =
Wife’s NOL
=
Total of Allocated Joint NOL
$ 4,000
-0$ 4,000
Net Operating Losses - Individual Taxpayers
Pages 51 - 52
 Allocation of Income and Deductions
where there is a change in marital status /
filing status
▪ See Figure 2.7 page 52
NOL Year
Filing Status
Single
MFJ
MFS
Single
Carryback /Carryforward Year
MFJ
MFS
No Allocations Income & Deductions Allocated No Allocations
NOL Allocated No Allocations
NOL Allocated
No Allocations No Allocations
No Allocations
Separate Returns May Reduce
Tax Liability
Page. 52 Ex 2.12
AGI for:
Tom
Mary
Total
2015
($19,000)
21,500
$ 2,500
2013
$30,000
40,000
$70,000
If file joint there is no NOL.
If file separate Tom has an NOL that he can
carryback to 2013 where their joint tax rate is
higher.
But must consider impact of MFS status.
Net Operating Losses - Individual Taxpayers
Page 53
Special Issues in NOL Computations
 Passive Activity Losses:
▪ Only currently deductible losses
become part of the NOL.
▪ Suspended losses become part of
computation in the year they come
out of suspension.
Net Operating Losses - Individual Taxpayers
Page 53
Ex 2.13
 Bridgett has a $30,000 rental loss in 2015.
 Can only deduct $25,000 in 2015.
 $5,000 suspended balance is carried to 2016
 Uses $25,000 as a business loss in
computing 2015 NOL.
 Uses the $5,000 as a business loss in
computing 2016 NOL -- IF -- the $5,000 is
deductible in 2016.
Net Operating Losses - Individual Taxpayers
Page 53
Special Issues in NOL Computations
 Sale of Assets Used in a Trade or Business:
▪ Gain or loss is from business for NOL comps
 S Corporations and Partnerships:
▪ NOLs NOT claimed by S Corp or PS
▪ Losses flow to SHs / Ps who use loss to
compute possible NOL
▪ Business / Non-Business nature determined by
SH / P status in the S Corp or PS.
Net Operating Losses - Individual Taxpayers
Page 54
Optimal Use of an NOL
 Some tax benefits may waste NOLs because:
▪ They may reduce the NOL in loss year even
though they do not reduce taxable income in
that year or any year.
▪ In carryback or carryfoward years other items
may reduce the NOL but not reduce taxable
income in that or another years.
 A CPA and I once wasted a lot of research, time
and effort arguing over an issue that had zero
dollar impact.
Net Operating Losses - Individual Taxpayers
Pages 54 - 58
Comprehensive Example- Refer to Text
Four steps to Compute NOL deductions for an
Individual:
1.
2.
3.
4.
Determine eligibility
Compute the NOL
Distribute NOL to carryback & carryfoward
years.
Calculate taxes in carryback and
carryforward years.
NOL Planning: A Case Study
Page 54
 Barb and Guy file MFJ & have 2 children.
 Their 2013, 2014 & 2015 income &
deductions are shown on page 55, Fig 2.9.
 Sch A Form 1045 shows an NOL of $22,500
in 2015. See page 56, Fig 2.10.
 They provided a projection of 2016 income
& deductions. See page 58, Fig 2.11.
 What advice do you give them to best use
their deductions?
NOL Planning: A Case Study
Page 54
 Barb and Guy file MFJ & have 2 children.
 Their 2013, 2014 & 2015 income &
deductions are shown on page 55, Fig 2.9.
 Sch A Form 1045 shows an NOL of $22,500
in 2015. See page 56, Fig 2.10.
 They provided a projection of 2016 income
& deductions. See page 58, Fig 2.11.
 What advice do you give them to best use
their deductions? Let’s look at the facts….
NOL Planning: A Case Study
Pages 55, 56 & from Appendix Page 68
Barb and Guy’s 2015 income and deductions:
Total Income
($ 20,823)
Adjusts to Inc
( 1,100)
AGI
($ 21,923)
Itemized Deducts
( 16,077) Includes $3,500 in RE taxes
Total
($ 38,000)
Add back:
Nonbus Cap Loss
900
Nonbus Deducts over
Nonbus Income
13,600 $15,600 (page 8) - $2,000
Dom. Prod. Act. Ded.
1,000
NOL
($ 22,500)
NOL Planning: A Case Study
Pages 57 - 58
Fig 2.11
Barb and Guy’s 2016 income and deductions projection:
Wages
$10,000
Interest
9,000
Business Income or (Loss)
30,000
Business capital gain
6,000
Non-Business capital gain
2,000
Total income
$57,000
DPAD (Domestic Production Activity Deduction) - 1,000
AGI
$56,000
$56,000
Itemized Deductions:
State inc. tax
3,000
Real estate
4,000
Mrtg. Interest
6,000
Total Itemized Deductions
$13,000 ( 13,000)
Pers. Exempt.
( 16,000)
Taxable income
$ 27,000
Net Operating Losses - Individual Taxpayers
Page 58
Optimal Use of an NOL
 If Non-Business deductions exceed:
▪ Non-Business ordinary income
▪ +
▪ Non-Business capital gains over losses
 In an NOL year then….
 The excess deductions will never provide a tax benefit.
Try to shift
Non-business deductions & capital losses to
another year for a tax benefit.
Or try to shift
Non-business income & capital gains to the loss year so it is
tax free.
NOL Planning: A Case Study
Page 58
So, you brilliantly tell Barb & Guy to delay
paying their 2015 real estate taxes until 2016.
The result is:
Their NOL in 2015 does not change.
They get an additional deduction in 2016.
Let’s see that the 2015 NOL does not change...
NOL Planning: A Case Study
Page 58
Barb and Guy’s 2015 income and deductions:
Total Income
($ 20,823)
($ 20,823)
Adjusts to Inc
( 1,100)
( 1,100)
AGI
($ 21,923)
$ 21,923
Itemized Deducts
( 16,077)
3,500
( 12,577)
Inc. after Item. Ded. ($ 38,000)
($ 34,500) Loss
Add back:
Nonbus Cap Loss
900
900
Nonbus Deducts over
Nonbus Income
13,600
(3,500)
10,100
Dom. Prod. Act. Ded.
1,000
1,000
NOL stay the same ($ 22,500)
($ 22,500)
NOL Planning: A Case Study
Compare Form 1045 on p. 56, Fig 2.10 to
Form 1045 on p. 59, Fig 2.12
Since Barb and Guy delayed payment of $3,500 real estate
tax until 2016, they reduce 2016 income
without reducing 2015 NOL
Schedule A, Form 1045 would reflect these differences:
2015
Before
Line 1 Loss before exemptions ( 38,000)
Line 9 Nonbus Deductions over
Nonbus Income
13,600
Line 22 Non-Bus Capital loss
900
Line 23 DPAD
1,000
Line 25 NOL does not change ( 22,500)
After
( 34,500)
Differ.
3,500
10,100
900
1,000
( 22,500)
(3,500)
0
0
0
NOL Planning: A Case Study
Pages 58 - 60
And / Or you could brilliantly tell your clients
to move non-business income or
non-business capital gains from 2016 to the loss year 2015.
The result is:
Their NOL in 2015 does not change.
They pay no tax on the income in 2016.
Let’s see how that works if we can move $900 of the $9,000 in
interest income from 2016 to 2015……….
NOL Planning: A Case Study
Pages 58 - 60
Barb and Guy’s 2015 income and deductions:
Total Income
($ 20,823)
Adjusts to Inc
( 1,100)
AGI
($ 21,923)
Itemized Deducts
( 16,077)
Total
($ 38,000)
Add back:
Nonbus Cap Loss
900
Nonbus Deducts over
Nonbus Income
13,600
Dom. Prod. Act. Ded.
1,000
NOL
($ 22,500)
NOL Planning: A Case Study
Pages 58 - 60
Barb and Guy’s 2016 income and deductions projection:
Wages
$10,000
Interest
9,000
Business
30,000
Business capital gain
8,000
Total income
$57,000
DPAD (Domestic Production Activity Deduction) - 1,000
AGI
$56,000
AGI
State inc. tax
Real estate
Mrtg. Interest
Total itemized
Pers. Exempt.
Taxable income
$56,000
3,000
4,000
6,000
13,000
( 13,000)
( 16,000)
$ 27,000
NOL Planning: A Case Study
Pages 58 - 60
Barb and Guy’s 2015 income and deductions:
Total Income
($ 19,923) $ 900
($ 20,823)
Adjusts to Inc
( 1,100)
( 1,100)
AGI
($ 21,023)
($ 21,923)
Itemized Deducts
( 16,077)
( 16,077)
Inc. after Item. Ded. ($ 37,100)
($ 38,000) Loss
Add back:
Nonbus Cap Loss
900
900
Nonbus Deducts over
Nonbus Income
12,700
($ 900)
12,700
Dom. Prod. Act. Ded.
1,000
1,000
NOL
($ 22,500)
($ 22,500)
NOL Planning: A Case Study
Compare Form 1045 on p. 56, Fig 2.10 to
Form 1045 on p. 61, Fig 2.13
Since Barb and Guy moved non-business income from 2016
to 2015 they reduce 2016 income without reducing their
2015 NOL
Schedule A, Form 1045 would reflect these differences:
2015
Before
Line 1 Loss before exemptions ( 38,000)
Line 9 Nonbus Deductions over
Nonbus Income
13,600
Line 22 Non-Bus Capital loss
900
Line 23 DPAD
1,000
Line 25 NOL does not change ( 22,500)
After
( 37,100)
Differ.
900
12,700
900
1,000
( 22,500)
( 900)
0
0
0
NOL Planning: A Case Study
Page 60
And / Or you could brilliantly tell your clients
to move non-business capital losses in excess of
non-business capital gains from the 2015 loss year to 2016.
The result is:
Their NOL in 2015 does not change.
They get a tax benefit from the non-business capital losses
in 2016 and would get none in 2015.
(But, we won’t go through the computations again)
Just compare the Form 1045 on page 56, Fig 2.10 to
Form 1045 on page 62, Fig 2.14
Net Operating Losses - Individual Taxpayers
The Thing to Remember is on Page 58
Optimal Use of an NOL
 If Non-Business deductions exceed:
▪ Non-Business ordinary income
▪ +
▪ Non-Business capital gains over losses
 In an NOL year then….
 The excess deductions will never provide a tax benefit.
Try to shift
Non-business deductions & capital losses to
another year for a tax benefit.
Or try to shift
Non-business income & capital gains to the loss year so it is
tax free.
Net Operating Losses - Individual Taxpayers
Page 60
 Waiving Carryback may reduce tax
liability – Use your “Crystal Ball”
▪ Are income & tax rates rising?
▪ Will credits be lost?
▪ Is income sufficient to use up a
carryforward only?
Net Operating Losses - Individual Taxpayers
Pages 60 - 64
 Present Value:
 To compare the impact of a CB to a CF you have
to take into account the present value of money.
▪ Taxpayers receive immediate dollar benefit
from a CB.
▪ Taxpayer dollar benefit from a CF takes place
later in time.
▪ Will the taxpayer get immediate benefit by relief
from making estimated tax payments or have to
wait until later returns are filed?
Net Operating Losses - Individual Taxpayers
Pages 60 - 64
 To measure the Present Value of
Carryfoward
▪ Use Figure 2.15 if tax savings are used to
reduce the estimated tax payments.
▪ Use Figure 2.16 if tax savings are used to
reduce the tax paid with the return or
increase the refund claimed on a return.
Remember - Present value is less than face
amount of tax savings of a carryforward.
Net Operating Losses - Individual Taxpayers
Page 64
Ex 2.17, Fig 2.17
 Taxpayers had a $55,000 NOL in 2015.
 Options are to the 2015 NOL:
▪ Carry the NOL back to 2013 or
▪ Carry the NOL forward to 2016
 2013 & 2016 income and deductions are
shown in Fig 2.17.
 CB = A $6,506 refund from 2013.
 CF = Reduces the $6,686 tax in 2016 to -0-.
 Do you recommend CB or CF?
Net Operating Losses - Individual Taxpayers
Page 64
Ex 2.17, Fig 2.17
▪ If the tax savings will be from reducing
estimated tax payments for 2016 the
present value of the $6,686 2016 tax
liability is $6,598.
▪ Thus, the present value of the CF is $6,598
▪ The $6,598 is greater than the $6,506
refund that would be received from a CB
to 2013.
▪ The taxpayer should therefore forgo the
CB…….But……
Net Operating Losses - Individual Taxpayers
Page 64
Ex 2.17, Fig 2.17
▪ If the tax savings will not be realized until
2017 when the 2016 return is filed the
present value of the $6,686 2016 tax
liability is $6,429.
▪ Thus, the present value of the CF is $6,429
▪ The $6,429 is less than the $6,506 refund
that would be received from a CB to 2013.
▪ The taxpayer should therefore take the CB
to 2013.
Electing to Forgo an NOL CB
Page 64, Fig 2.18
▪ To forgo a CB in favor of a CF the
taxpayer must make an election on their
timely filed return (including extensions).
▪ See Fig 2.18 for a sample election which
reads:
Taxpayers elect to forgo the net
operating loss carryback period under
I.R.C. § 172(b)(3)(C) for the net operating
loss shown on this return.
Appendix
Pages 65 - 70
▪ These pages shows computations used in
the Case Study and can be used aws
worksheets to help in computing:
• Business and Non-business capital
gains and losses.
• Nonbusiness income and deductions
to complete Sch A, Form 1045.
• Itemized deductions for intervening
years.
Net Operating Losses - Corporations
Corporation v Individual NOLs




Same steps as an individual
Same 2-year CB and 20-year CF
Same sequence with 2 or more NOLs
Different from an NOL for individuals:
▪ Different deductions to compute NOL
▪ Different modifications in CB and CF years
▪ Different forms for claiming NOL deduction
Net Operating Losses - Corporations
Figuring the Corporate NOL:
 Start with Corporations Taxable Income
▪ No increase in current NOL for CBs or CFs
▪ Eliminate Domestic Production Activities
Deduction
▪ Can take deduction for dividends received
without regard to aggregate limits (70% or
80% of taxable income)
▪ Can figure deduction for certain dividends
paid
Net Operating Losses - Corporations
 Claiming the Corporate NOL
▪ Form 1139 or Form 1120X
▪ Can extend time for paying tax for year
preceding NOL -- Use Form 1138
 Figuring the NOL
▪ Computes Modified Taxable Income to
determine how much of NOL will be
used in a year and CO to other years
Net Operating Losses - Corporations
Modified Taxable Income:
 Use Taxable Income and
▪ Deduct NOLs only from prior years
▪ Compute charitable contribution
deduction without considering NOL CBs.
 Modified Taxable Income cannot be less
than zero
 Modified Taxable Income is not used to
complete tax return or figure tax
That’s All for NOLs
Don't bite the hand that... looks dirty.
If you lie down with dogs, you'll... stink in the morning.
Love all, trust ... me.
The pen is mightier than the... pigs.
An idle mind is... the best way to relax.
Where there's smoke there's... pollution.
Happy the bride who... gets all the presents.
A penny saved is... not much.
A bird in the hand is... Is going to poop on you.