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Tax benefits of net operating losses

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How are the tax benefits of net operating losses (NOL) disclosed on financial statements? Which is more beneficial to an organization, a NOL carry-forward or a NOL carry-back? Why? When would a company decide to forego a carry-back?

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How are the tax benefits of net operating losses (NOL) disclosed on financial statements?

If your deductions for the year are more than your income for the year, you may have an NOL.

There are rules that limit what you can deduct 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.

The 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.

Schedule A (Form 1045). Use Schedule A (Form 1045) to figure an NOL. The following discussion explains Schedule A
First, complete Schedule A, line 1, using amounts from your return. If line 1 is a negative amount, you may have an NOL.

Next, complete the rest of Schedule A to figure your NOL.

Nonbusiness deductions (line 6). Enter on line 6 deductions that are not connected to your trade or business or your employment. Examples of deductions not related to your trade or business are:
Alimony,

Contributions to an IRA or other self-employed retirement plan,

Health savings account deduction,

Archer MSA deduction,

Itemized deductions (except for casualty and theft losses, state income tax on business profits, and any employee business expenses), and

The standard deduction (if you do not itemize your ...

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Sandeep Bardia, MBA
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  • MBA, Rochester Institute of Technology
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