J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.18 Net Operating Losses (NOLs)

A loss incurred in your profession or unincorporated business is deducted from other income reported on Form 1040. If the loss exceeds your other income, you may have a net operating loss (NOL). An NOL can be used to offset income in other years. More specifically, you can usually carry the NOL back for two years and then forward for up to 20 years. A three-year carryback is allowed for an NOL attributable to casualty or theft losses, and for a qualified small business NOL attributable to a Presidentially declared disaster. A farming net operating loss may be carried back five years. See the instructions to Form 1045 for further details. A loss carried back to a prior year reduces income of that year and entitles you to a refund. A loss applied to a later year reduces income for that year. You may elect to carry forward your 2012 loss for 20 years, foregoing the carryback (40.22).

The rules below apply not only to self-employed individuals, farmers, and professionals, but also to individuals whose casualty losses exceed income, stockholders in S corporations, and partners whose partnerships have suffered losses. Each partner claims his or her share of the partnership loss.

Carryover of loss from prior year to 2012.

If you had a net operating loss in an earlier year that is being carried forward to 2012, the loss carryover is reported as a minus figure on Line 21 of Form 1040. You must attach a detailed statement showing how you figured the carryover. ...