When a taxpayer’s deductions in a year are more than their income for the year, it may create a loss that may be carried over to a subsequent tax year. A Net Operating Loss can be used to reduce your taxable income in another year or years. Prior to the enactment of the Tax Cuts and Jobs Act, a net operating loss could be carried back, but starting 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.
To have an Net Operating Loss the taxpayer’s loss would typically be caused by deductions from the following:
Trade or business
Casualty and theft losses
Rental property
Prior to the passage of the Tax Cuts and Jobs Act moving expenses and unreimbursed expenses as employee could also cause an net operating loss to occur 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.
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 enter in different menus in the tax program if it affects a Schedule C. Set forth below are
Entering a prior year net operating loss on Form 1040
From the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Other Income
- Carryover from Prior Year(s)
Entering an Unallowed loss on Schedule C
From the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Business Income/Loss (Sch C, C-EZ, 1099MISC)
- Select ‘New’ or double-click the entry you wish to ‘Edit’. Select ‘Pull’ if you prepared the return using the software in the previous year and wish to pull the data forward.
- Select Schedule C or Schedule C-EZ
- Select either Taxpayer or Spouse
- Input the Business Code
- Input the Schedule C Data
- Select Exit Menu until you reach Schedule C – Edit Menu
- Select Answer Schedule C Questions
- Select 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, the Keystone Tax Solutions Pro program will recognize a loss carry over 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 ‘New’ or double-click the entry you wish to ‘Edit’. Select ‘Pull’ if you prepared the return using the software in the previous year and wish to pull the data forward.
- Input the Schedule E Data
- Select Expenses
- Select 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 ‘New’ or double-click the entry you wish to ‘Edit’. Select ‘Pull’ if you prepared the return using the software in the previous year and wish to pull the data forward.
- Select the Principal Activity Code that Best Describes Your Source of Income
- Input the Schedule F Data
- Select Exit Menu until you reach Schedule F – Questions Menu
- Select Prior Year Unallowed Loss
NOTE: This is a guide on entering a Prior Year Net Operating Loss into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
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