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return includes an NOL deduction from an NOL

Line 7. Ida had itemized deductions and

How To Figure

entered $1,000 on line 3, so she completes lines

year before 2006 that reduced your taxable in-

11 through 35 to figure her adjustment to item-

come to zero (to less than zero, if an estate or

an NOL Carryover

trust), see NOL Carryover From 2006 to 2007,

ized deductions. On line 7, she enters the total

later.

adjustment from line 35.

Line 11. Ida’s adjusted gross income for

If your NOL is more than your taxable income for

Illustrated Schedule B (Form

2004 was $29,000.

the year to which you carry it (figured before

deducting the NOL), you may have an NOL

Line 12. She adds lines 3 through 6 and

1045)

carryover. You must make certain modifications

enters $1,000 on line 12. (This is her net capital

to your taxable income to determine how much

loss deduction added back, which modifies her

The following example illustrates how to figure

NOL you will use up in that year and how much

adjusted gross income.)

an NOL carryover from a carryback year. It in-

you can carry over to the next tax year. Your

Line 13. Her modified adjusted gross income

cludes a filled-in Schedule B (Form 1045).

carryover is the excess of your NOL deduction

for 2004 is now $30,000.

over your modified taxable income for the car-

Line 14. On her 2004 tax return, she de-

Example. Ida Brown runs a small clothing

ryback or carryforward year. If your NOL deduc-

ducted $550 as medical expenses.

shop. In 2006, she has an NOL of $36,000 that

tion includes more than one NOL, apply the

Line 15. Her actual medical expenses were

she carries back to 2004. She has no other

NOLs against your modified taxable income in

$2,725.

carrybacks or carryovers to 2004.

the same order in which you incurred them,

Line 16. She multiplies her modified ad-

Ida’s adjusted gross income in 2004 was

starting with the earliest.

justed gross income, $30,000, by .075. She en-

$29,000, consisting of her salary of $30,000

ters $2,250 on line 16.

minus a $1,000 capital loss deduction. She is

Modified taxable income. Your modified tax-

Line 17. The difference between her actual

single and claimed only one personal exemption

able income is your taxable income figured with

medical expenses and the amount she is al-

of $3,100. During that year, she gave $1,450 in

the following changes.

lowed to deduct is $475.

charitable contributions. Her medical expenses

1. You cannot claim an NOL deduction for

Line 18. The difference between her medical

were $2,725. She also deducted $1,650 in taxes

the NOL carryover you are figuring or for

deduction and her modified medical deduction is

and $1,125 in home mortgage interest.

any later NOL.

$75. She enters this on line 18.

Her deduction for charitable contributions

Line 19. She enters her modified adjusted

was not limited because her contributions,

2. You cannot claim a deduction for capital

gross income of $30,000 on line 19.

$1,450, were less than 50% of her adjusted

losses in excess of your capital gains.

Line 20. She had no other carrybacks to

gross income. The deduction for medical ex-

Also, you must increase your taxable in-

2004 and enters zero on line 20.

penses was limited to expenses over 7.5% of

come by the amount of any section 1202

adjusted gross income (.075 × $29,000 =

Line 21. Her modified adjusted gross income

exclusion claimed on Schedule D (Form

$2,175; $2,725 − $2,175 = $550). The deduc-

remains $30,000.

1040).

tions for taxes and home mortgage interest were

Line 22. Her actual contributions for 2004

3. You cannot claim the domestic production

not subject to any limits. She was able to claim

were $1,450, which she enters on line 22.

activities deduction.

$4,775 ($1,450 + $550 + $1,650 + $1,125) in

Line 23. She now refigures her charitable

itemized deductions for 2004. She had no other

4. You cannot claim a deduction for your ex-

contributions based on her modified adjusted

deductions in 2004. Her taxable income for the

emptions for yourself, your spouse, or de-

gross income. Her contributions are well below

year was $21,125.

pendents.

the 50% limit, so she enters $1,450 on line 23.

Ida’s $36,000 carryback will reduce her 2004

Line 24. The difference is zero.

5. You must figure any item affected by the

taxable income to zero. She completes the col-

Lines 25 through 34. Ida had no casualty

amount of your adjusted gross income af-

umn for the second preceding tax year ended

losses or deductions for miscellaneous items in

ter making the changes in (1), (2), and (3),

12/31/04 of Schedule B (Form 1045) to figure

2004 so she leaves these lines blank.

above, and certain other changes to your

how much of her NOL she uses up in 2004 and

Line 35. She combines lines 18, 24, 29, and

adjusted gross income that result from (1),

how much she can carry over to 2005. See the

34 and enters $75 on line 35. She carries this

(2), and (3). This includes income and de-

illustrated Schedule B shown on page 13. Ida

figure to line 7.

duction items used to figure adjusted gross

does not complete the column for the first pre-

Line 8. Ida enters the deduction for her per-

income (for example, IRA deductions), as

ceding tax year ended 12/31/05 because the

sonal exemption of $3,100 for 2004.

well as certain itemized deductions. To fig-

$10,700 carryover to 2005 is completely used

Line 9. After combining lines 2 through 8,

ure a charitable contribution deduction, do

up that year. (See the information for line 9

Ida’s modified taxable income is $25,300.

not include deductions for NOL carrybacks

below.)

Line 10. Ida figures her carryover to 2005 by

in the change in (1) but do include deduc-

Line 1. Ida enters $36,000, her 2006 net

subtracting her modified taxable income (line 9)

tions for NOL carryforwards from tax years

operating loss, on line 1.

from her NOL deduction (line 1). She enters the

before the NOL year.

Line 2. She enters $21,125, her 2004 tax-

$10,700 carryover on line 10. She also enters

Your taxable income as modified cannot be

able income, on line 2.

the $10,700 as her NOL deduction for 2005 on

less than zero.

Line 3. Ida enters her net capital loss deduc-

Form 1045, page 1, line 10, in the “After car-

tion of $1,000 on line 3.

ryback” column under the column for the first

Schedule B (Form 1045). You can use

preceding tax year ended 12/31/05. (For an il-

Line 6. Although Ida’s entry on line 3 modi-

Schedule B (Form 1045) to figure your modified

lustrated example of page 1 of Form 1045, see

fies her adjusted gross income, that does not

taxable income for carryback years and your

Illustrated Form 1045 under How To Claim an

affect any other items included in her adjusted

carryover from each of those years. Do not use

NOL Deduction, earlier.)

gross income. Ida enters zero on line 6.

Schedule B for a carryforward year. If your 2006

Page 12

Publication 536 (2006)

Publication 536 - Net Operating Losses (Nols) For Individuals, Estates, And Trusts - Internal Revenue Service - 2006 Page 12

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