Net Operating Losses and U.S. Income Taxes

A net operating loss (NOL) for tax purposes, occurs when your deductions for a year are greater than your taxable income for the year. If you have negative taxable income when you prepare your tax return, you may have a net operating loss. This is generally caused by deductions from a trade or business, or from renting property. A net operating loss may also result from deductions for work as an employee, or from moving expenses. Casualty and theft losses may be another source of a net operating loss. The year this occurs is called the NOL year. You may be able to carry forward or carry back a net operating loss to another tax year and apply it against taxable income for that year.

The most common reason for a net operating loss is a loss from operating a business – expenses incurred in the business exceed the revenue generated by the business. This may occur in the first year or years of operation, or during a later year. The deduction of a net operating loss, for U.S. income tax purposes, is available to individuals, estates, and trusts. Partnerships and S corporations generally cannot use net operating losses, but partners and shareholders can take their individual shares of business income and deductions into account in calculating their individual net operating losses.

Figuring a Net Operating Loss

To claim a net operating loss, you must first calculate the amount that can be taken as a deduction to be applied against taxable income from another year. The net operating loss allowable is not necessarily the same as the negative taxable income shown on your tax return for the year.

Deductions Not Included In Net Operating Loss