Computing a net operating loss for an individual

By | November 20, 2015

Speaking broadly, you may be able to benefit by carrying what is called a “net operating loss” (NOL) into a different year-a year in which you have taxable income-and taking a deduction for it against that different year’s income. This would be known as taking a net operating loss deduction (NOL deduction). In general, the loss can be carried back 2 years and forward for up to 20 years to “seek out” taxable income against which it will be deducted. However, most taxpayers can elect a three-, four-, or five-year carryback period (instead of two years) for 2008 and 2009 NOLs.


How to Calculate Net Operating Loss (NOL) for Individual (non-business NOL)

In determining what your NOL is, however, you don’t simply use your negative taxable income off your tax return. Several modifications must be made. These include the following:

(1) You cannot use your personal or dependency exemptions.
(2) You cannot use any NOL from a different year.
(3) “Nonbusiness” capital losses (those arising outside of your trade or business, or your employment) can only be used against “nonbusiness” capital gains. Excess capital losses cannot increase your NOL.
(4) “Nonbusiness” deductions (e.g., charitable donations, deductible medical expenses, mortgage interest, alimony, etc.) can only be used against “nonbusiness” income (interest, dividends, etc.).

(5) Finally, “business” capital losses can only be used against “business” capital gains, except that if you still have nonbusiness capital gains after netting nonbusiness capital losses and excess nonbusiness deductions against them, you can use your business capital losses against them.


Obviously, the above computations can grow quite complex, depending upon your particular circumstances.


Personal Net-Operating Loss Calculation

Ted has a loss of $20,000 from his business operations for the year. He also has (i) nonbusiness capital gains of $9,000 and nonbusiness capital losses of $4,000, and (ii) nonbusiness income of $13,000 and nonbusiness deductions of $14,000 (not including personal or dependency exemptions). He has no business capital gains or losses. Ned’s “starting point” for his NOL is his $20,000 business loss. His capital losses reduce his capital gains to $5,000 ($9,000 # $4,000).


Nonbusiness deductions wipe out his nonbusiness income

His nonbusiness deductions wipe out his nonbusiness income ($14,000 # $13,000) leaving him with $1,000 “excess” nonbusiness deductions. Ted can use the $1,000 excess nonbusiness deductions to further reduce his capital gains to $4,000. However, the $4,000 of capital gains do reduce Ted’s NOL from $20,000 to $16,000. The final result: Ted incurs a $16,000 NOL for the tax year. (Note: Ted’s taxable income will show a larger loss because of the modification rules, e.g., his taxable income includes his personal exemption. Only the $16,000 NOL, however, can be carried to other years for use as an NOL deduction.)