A net operating loss (NOL) is created when a taxpayer's deductions in a year are more than their income for the year, and the NOL may be carried over to other years to be used to reduce their taxable income.
Prior to the enactment of the Tax Cuts and Jobs Act of 2017 an NOL could be carried back, but beginning in 2018 most losses (other than certain farm losses) must be carried forward. A loss from operating a business is the most common reason for an NOL.
An NOL is typically be caused by deductions from the following:
- A trade or business
- Casualty and theft loss
- Rental property
Prior to the passage of the Tax Cuts and Jobs Act of 2017, moving expenses and unreimbursed expenses as an employee could also contribute to an NOL but these deductions have been greatly restricted or eliminated.
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.
There are rules that limit what can be deducted when figuring an NOL. In general, the following items are not allowed when figuring an NOL.
- Any deduction for personal exemptions (suspended 2018-2025).
- Capital losses in excess of capital gains.
- Section 1202 exclusion of 50% of the gain from the sale or exchange of qualified small business stock.
- Nonbusiness deductions in excess of nonbusiness income.
- Net operating loss deduction.
- The domestic production activities deduction.
Depending on the source of the prior year loss, it may be entered in different menus in the tax program.
Entering a prior year NOL on Form 1040
From the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Other Income
- NOL Carryover from Prior Year(s)
Entering an unallowed loss on Schedule C
From the Main Menu of the tax return (Form 1040) select:
- Income
- Business Income/Loss (Sch C, 1099-MISC, 1099-NEC)
- Select the Schedule C, or create it if needed
- Answer Schedule C Questions
- Prior Year Unallowed Loss
Short term / long term loss carryover on Schedule D
From the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Capital Gain/Loss (Sch D)
- Other
- Short Term Loss Carryover or Long Term Loss Carryover
Note: If you are pulling a return forward from the previous year, TaxSlayer Pro will recognize a loss carryover and advise you that it is being pulled forward.
Unallowed loss on Schedule E
From the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities, (Sch E, K-1, 4835, 8582)
- Rents and Royalties
- Select the Schedule E, or create it if needed
- Expenses
- Unallowed Loss
Unallowed loss on Schedule F
From the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Farm Income (Sch F)
- Select the Schedule F, or create it if needed
- Answer Schedule F Questions
- Prior Year Unallowed Loss
Note: This is a guide on entering a Prior Year Net Operating Loss into the TaxSlayer Pro program. This is not intended as tax advice.
Additional Information:
Desktop: How To Input A Prior Year Loss Carryover On Form 1120