J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Net Operating Losses

If deductions and losses from your business exceed your business income, you may be able to use the losses to offset income in other years. Net losses from the conduct of your business are net operating losses (NOLs). In 2009 (the last year for which statistics are available), NOLs claimed on individual returns exceeded $124 billion.

Net operating losses are not an additional loss deduction. Rather, they are the result of your deductions exceeding the income from your business. The excess deductions are not lost; they are simply used in certain other years.

You have an NOL if you have deductions from a trade or business, deductions from your work as an employee, or deductions from casualty and theft losses.

Only individuals and C corporations can claim NOLs. Partnerships, limited liability companies (LLCs), and S corporations cannot have NOLs, since their income and losses pass through to owners. However, partners, LLC members, and S corporation shareholders can have NOLs on their individual returns. These NOLs are created by their share of the business’s operating losses.

Calculating NOLs

After you have completed your tax return for the year, you may find that you have an NOL. If you are an individual, you may have an NOL if your adjusted gross income, reduced by itemized deductions or the standard deduction (but before personal exemptions), is a negative figure. C corporations may have an NOL if taxable income is a negative figure. This negative figure merely ...