Net Operating Loss (NOL)
A net operating loss occurs when a business's allowable tax deductions exceed its taxable income. NOLs can be carried forward indefinitely but are limited to 80% of taxable income in the carryforward year.
Exam Tip
NOL = deductions exceed income. Carry forward indefinitely, limited to 80% of taxable income. No carryback (except farming losses). Computed using modifications to taxable income.
What is a Net Operating Loss?
An NOL arises when deductible expenses exceed gross income from trade or business activities, calculated on an individual's tax return.
NOL Carryforward Rules (Post-TCJA)
| Rule | Detail |
|---|---|
| Carryforward | Indefinite (no expiration) |
| Carryback | Generally NOT allowed |
| Farming losses | 2-year carryback allowed |
| Deduction limit | 80% of taxable income per year |
How to Claim an NOL
| Method | Form |
|---|---|
| Carryforward | Schedule 1 / Form 1040 |
| Farm carryback | Form 1045 (quick refund) or amended return |
| Compute NOL | Use modifications to taxable income |
Key NOL Modifications
When computing an individual's NOL, you must add back: personal exemption deductions, capital losses exceeding capital gains, nonbusiness deductions exceeding nonbusiness income.
Exam Alert
NOLs carry forward indefinitely but are limited to 80% of taxable income. No carryback except farming (2 years). Form 1045 is used for quick refund claims.
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Related Terms
Schedule C (Profit or Loss from Business)
Schedule C is the IRS form used by sole proprietors and single-member LLCs to report business income and expenses. Net profit is subject to both income tax and self-employment tax.
Self-Employment Tax
Self-employment tax is the combined Social Security (12.4%) and Medicare (2.9%) tax that self-employed individuals pay on net earnings from self-employment, totaling 15.3%.
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