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A loss from operating a business is the most

See How To Get Tax Help near the end of

discussion explains Schedule A and includes an

common reason for an NOL.

this publication for information about getting

illustrated example.

Partnerships and S corporations generally

these forms.

First, complete Schedule A, line 1, using

cannot use an NOL. However, partners or

amounts from your return. If line 1 is a negative

shareholders can use their separate shares of

amount, you may have an NOL.

the partnership’s or S corporation’s business

NOL Steps

Next, complete the rest of Schedule A to

income and business deductions to figure their

figure your NOL.

individual NOLs.

Follow Steps 1 through 5 to figure and use your

Nonbusiness deductions (line 6). Enter

Keeping records. You should keep records

NOL.

on line 6 deductions that are not connected to

for any tax year that generates an NOL for three

your trade or business or your employment. Ex-

Step 1. Complete your tax return for the year.

years after you have used the carryback/car-

amples of deductions not related to your trade or

You may have an NOL if a negative figure ap-

ryforward or three years after the carryforward

business are:

pears on the line below:

expires.

•

Alimony,

What is not covered in this publication?

•

Contributions to an IRA or other

Individuals — Form 1040, line 41, or Form

The following topics are not covered in this publi-

self-employed retirement plan,

1040NR, line 38.

cation.

•

Health savings account deduction,

•

Estates and trusts — Form 1041, line 22.

Bankruptcies. See Publication 908, Bank-

•

ruptcy Tax Guide.

Archer MSA deduction,

If the amount on that line is not negative, stop

•

Itemized deductions (except for casualty

NOLs of corporations. See Publication

here — you do not have an NOL.

542, Corporations.

and theft losses, state income tax on busi-

ness profits, and any employee business

Step 2. Determine whether you have an NOL

expenses), and

and its amount. See How To Figure an NOL,

Comments and suggestions. We welcome

later. If you do not have an NOL, stop here.

•

your comments about this publication and your

The standard deduction (if you do not

suggestions for future editions.

itemize your deductions).

Step 3. Decide whether to carry the NOL back

You can write to us at the following address:

to a past year or to waive the carryback period

Do not enter business deductions on line 6.

and instead carry the NOL forward to a future

Internal Revenue Service

These are deductions that are connected to your

year. See When To Use an NOL, later.

Individual Forms and Publications Branch

trade or business. They include the following.

SE:W:CAR:MP:T:I

Step 4. Deduct the NOL in the carryback or

•

1111 Constitution Ave. NW, IR-6406

State income tax on business profits.

carryforward year. See How To Claim an NOL

Washington, DC 20224

•

Moving expenses.

Deduction, later. If your NOL deduction is equal

to or less than your taxable income without the

•

Educator expenses.

We respond to many letters by telephone.

deduction, stop here — you have used up your

•

Therefore, it would be helpful if you would in-

The deduction of one-half of your

NOL.

clude your daytime phone number, including the

self-employment tax or your deduction for

Step 5. Determine the amount of your unused

area code, in your correspondence.

self-employed health insurance.

NOL. See How To Figure an NOL Carryover,

You can email us at *taxforms@irs.gov. (The

•

Domestic production activities deduction.

later. Carry over the unused NOL to the next

asterisk must be included in the address.)

•

carryback or carryforward year and begin again

Please put “Publications Comment” on the sub-

Rental losses.

at Step 4.

ject line. Although we cannot respond individu-

•

Loss on the sale or exchange of business

ally to each email, we do appreciate your

Note. If your NOL deduction includes more

real estate or depreciable property.

feedback and will consider your comments as

than one NOL amount, apply Step 5 separately

•

we revise our tax products.

Your share of a business loss from a part-

to each NOL amount, starting with the amount

nership or S corporation.

Ordering forms and publications. Visit

from the earliest year.

•

to download forms and

Ordinary loss on the sale or exchange of

publications, call 1-800-829-3676, or write to the

stock in a small business corporation or a

address below and receive a response within 10

small business investment company.

How To Figure an NOL

business days after your request is received.

•

If you itemize your deductions, casualty

National Distribution Center

and theft losses (even if they involve non-

If your deductions for the year are more than

P. O. Box 8903

business property) and employee busi-

your income for the year, you may have an NOL.

Bloomington, Il 61702-8903

ness expenses (such as union dues,

There are rules that limit what you can de-

uniforms, tools, education expenses, and

duct when figuring an NOL. In general, the fol-

travel and transportation expenses).

Tax questions. If you have a tax question,

lowing items are not allowed when figuring an

•

visit or call 1-800-829-1040. We

Loss on the sale of accounts receivable (if

NOL.

cannot answer tax questions at either of the

you use an accrual method of accounting).

•

Any deduction for personal exemptions.

addresses listed above.

•

Interest and litigation expenses on state

•

Capital losses in excess of capital gains.

and federal income taxes related to your

Useful Items

•

business.

The section 1202 exclusion of 50% of the

You may want to see:

gain from the sale or exchange of qualified

•

Unrecovered investment in a pension or

small business stock.

Publication

annuity claimed on a decedent’s final re-

•

turn.

Nonbusiness deductions in excess of non-

❏ 4492 Information for Taxpayers Affected

business income.

•

by Hurricanes Katrina, Rita, and

Payment by a federal employee to buy

•

Wilma

back sick leave used in an earlier year.

Net operating loss deduction.

•

The domestic production activities deduc-

Form (and Instructions)

Nonbusiness income (line 7). Enter on

tion.

line 7 only income that is not related to your

❏ 1040X Amended U.S. Individual Income

trade or business or your employment. For ex-

Tax Return

Schedule A (Form 1045). Use Schedule A

ample, enter your annuity income, dividends,

❏ 1045 Application for Tentative Refund

(Form 1045) to figure an NOL. The following

and interest on investments. Also, include your

Page 2

Publication 536 (2006)

Publication 536 - Net Operating Losses (Nols) For Individuals, Estates, And Trusts - Internal Revenue Service - 2006 Page 2

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