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10863: 1040 - Net Operating Loss FAQs


1040 Individual

1040 Net Operating Loss Frequently asked questions.

 

  1. What is a net operating loss?
  2. Where can I enter prior year net operating losses in a 1040 return?
  3. Why is the entire NOL carryover being used on the return?
  4. How do I tell if there is a current-year net operating loss in an individual return?
  5. How do I tell if a current-year NOL will be carried forward?
  6. Where can I enter carryback amounts for an NOL?
  7. What changes are there for a NOL carryforward in Drake19?

1. What is a net operating loss?
A net operating loss occurs when a taxpayer's allowable tax deductions are greater than the taxable income, resulting in negative taxable income. More simply put, an NOL occurs when the taxpayer has more expenses (or deductions) than revenue (or income). Most commonly NOLs are generated from trade or business income, such as that from Schedule C, Schedule E and Schedule F.

See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, for more information. Also refer to Schedule A in the Instructions for Form 1045, Application for Tentative Refund.

This is a general description of software features that may be used to deal with net operating losses (NOLs) in a 1040 return. For details, see Related Links below.

Starting in Drake18: 

 The CARES Act has reversed the carryback rules put in place by the Tax Cuts and Jobs Act (TCJA) for tax years 2018, 2019, and 2020. Taxpayers can carry back NOLs, including non-farm NOLs, arising from tax years beginning in 2018, 2019, and 2020 for 5 years. See Publication 536 and Related Links below for further information.

For a farmer or insurance company, a NOL can be carried back 2 years. All other taxpayers can only carry forward NOLs. See Related Links below and FAQ 7 for details on other changes to NOLs. 

  1. 1045 Screen. This screen is for Form 1045 Application for Tentative Refund, pages 1 and 2, and Form 1045, Schedule B (pages 4 and 5). This page requests a refund of taxes paid in prior years to which you are now carrying back a current-year NOL. 
  2. NOL Screen. This screen is for Form 1040, Schedule A (page 3 of Form 1045). Once you begin data entry here, the software generates all pages of Form 1045. 
    1. Schedule A – NOL. This is for page 3 of Form 1045.
      1. Schedule A calculates and displays your current-year return NOL, based on data already entered in the return. Data entry fields are all overrides.
      2. Farmers and insurance companies can check the box Election to carry forward ONLY to produce Schedule A by itself.
  3. LOSS screen.
    1. Shows what NOLs were generated and used in past years.
    2. Note: Never enter current-year NOL data on a LOSS screen.
    3. Does not display the current-year NOL to be carried forward. That appears on the worksheets below.

NOL worksheets:

  1. Wks CARRY displays any current and prior-year NOL available to be carried forward. The carryforward will appear on next year’s LOSS screen when the return is updated. WKs CARRY must be enabled on the Setup > Options > Form & Schedule Options tab.
  2. Wks NOL is what next year’s LOSS screen will look like when the return is updated, including the carryforward.
  3. Wks NOLCO displays any prior-year NOL to be carried forward. The carryforward will appear on next year’s LOSS screen when the return is updated.

2. Where can I enter prior year net operating losses in a 1040 return?

In data entry in a 1040 return, go to the LOSS screen. The Drake16 LOSS screen is displayed in the example below, where 2016 is the current year. Enter the amount for each year in the column Available Carryforward and then enter amounts in the Used Prior to 2016 column.

Note that the LOSS screen fields are direct entry - you must complete each field as needed. Do not enter a current year loss on the LOSS screen. Note how the losses were entered in this example:

3. Why is the entire NOL carryover being used on the return?

When you have a prior year NOL carryover, the entire amount will be shown on Schedule 1, line 8 (Schedule 1, line 21 in Drake 18 or Form 1040, line 21 in Drake17 and prior), even if the gain in the current year is less than the NOL being carried forward. The full amount* of NOL carryover available will show per IRS guidelines:

Publication 536:

"If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on the “Other income” line of Schedule 1 (Form 1040) or Form 1040-NR (line 8 for 2022)."

1040 Instructions:

"Enter on line 8a any NOL deduction from an earlier year. Enter the amount in the preprinted parentheses (as a negative number). The amount of your deduction will be subtracted from the other amounts of income listed on lines 8b through 8z."

If the Net Operating Loss can be applied to the current year income, it will be applied. Any remaining NOL carryover will be calculated and shown on Wks NOL, Wks NOLCO, and Wks CARRY.

 

Wks NOLCO calculates the modified taxable income and the amount to carry to next year.

Wks NOL in View Mode shows the total NOL for each year, the amount used in the current year and the remaining NOL.

*If there is an NOL carryforward that is disallowed on Wks NOL due to the 80% of taxable income limitation, the amount printed on Schedule 1, line 8 will be different than the total of all carryforwards entered on the LOSS screen. If all carryforwards are from post-2017, and are disallowed, nothing will be shown on Schedule 1, line 8, however the required statements and worksheets will still be generated. This information is shown on Wks NOL as below:

For more information on NOLs, see Publication 536.

Note: You can also see the carryover to next year's return under Wks Carry located in the miscellaneous section.

4. How do I tell if there is a current-year net operating loss in an individual return?

Form 1045 Schedule A - NOL for TY 2015 is page 3. In prior years, it was page 2.

If the income minus either the standard or itemized deduction amount on Form 1040 is negative, there may or may not be an NOL. You can review the calculations on Form 1045 Schedule A - NOL. On Form 1045 page 3:

  • line 1 flows from Form 1040, line 11 minus line 12 (Form 1040, line 9 minus line 8b in Drake19; Form 1040, line 41 in Drake17 and prior). 
  • an NOL appears as a negative number on line 24 (line 25 in Drake19 and prior).

Form 1045 Schedule A - NOL if either

  • There is an NOL, which appears on line 24 (line 25 in Drake19 and prior) as a negative number and appears on the WK_NOL in the Remaining Carryover column.
  • Or you have selected the PRNT screen option Print Form 1045 page 3 (Schedule A - NOL) and the AGI minus standard/itemized deduction is negative.

5. How do I tell if a current-year NOL will be carried forward?
 
For NOLs acquired after December 31, 2017, If the taxpayer/entity is not a farmer or insurance company, it cannot be carried back at all, and thus will be carried forward only. 

A current-year NOL always appears in View on: 

  • Form 1045, page 3 (1045.PG3)
  • Worksheet Wks NOL (WK_NOL in Drake15 and prior)

Review Wks Carry and Wks NOLCO, if present, for more information on the NOL calculations and carryforward amounts. 

6. Where can I enter carryback amounts for an NOL?

Enter only NOL carryback amounts on screen 3:

  • line 8a (Drake21)
  • line 8 (Drake19 and 20)

Use this field for carryback amounts from future years, to amend the current-year amount, or to adjust carryback amounts calculated from the LOSS screen. 

Carryforward amounts should be entered on the LOSS screen, located on the Other Forms tab (In Drake15 and prior, located on the Miscellaneous tab).

7. What changes are there for a NOL carryforward in Drake19?

The Tax Cuts and Jobs Act had limited NOL carryforward amounts that arose after December 31, 2017 to 80% of the taxable income, while NOL amounts from prior to 2017 were still allowed at 100% of the taxable income. The CARES Act, however, reverses this limitation and now allows NOL incurred in 2018 to offset up to 100% of the 2019 taxable income. A patch was released for Drake19 on April 29, 2020 to address this change. See Related Links below for additional information.

If a return with NOL carryovers has not yet been filed, go to the LOSS screen and uncheck the box Process NOL carryforward using "taxable income without NOL carryforward" figure. This clears EF message 5472. 

Any 2019 returns already filed using the 80% limitation should be amended to reflect the 100% limitation. To amend a return to allow the NOL to offset 100% of the taxable income, follow these steps in Drake19: 
  1. Open the return and make an archive of the original filing. 
  2. Auto-fill the X screen. 
  3. Go to the LOSS screen and uncheck the box Process NOL carryforward using "taxable income without NOL carryforward" figure.
  4. Make any other necessary changes. 
  5. Calculate the return again.
  6. In view mode, see Wks Carry, Wks NOLCO, Wks NOL, and/or Wks NOLA.
    • These worksheets will show how much NOL is allowed to be applied this year and what amounts must be carried forward.
  7. If any NOL is allowed to be used this year, an amount will flow to Schedule 1, line 8 as a negative number with the literal "NOL."
    • Statement #1 is also produced with a breakdown of the amounts for each year. 

Note: This limitation does not apply to alternative minimum tax (AMT) calculations.


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