Net Operating Loss (NOL)

Net Operating Loss
Net Operating Loss. Vincent Besnault/Getty Images

What is a Net Operating Loss?

A net operating loss (NOL) results from the situation in which a business has more allowable tax deductions than it has taxable income. In this case, the business has negative income, or a net operating loss.

Net operating loss is applicable only to pass-through businesses, including sole proprietorships, LLCs, partnerships, and S corporations, in which the income or loss from the business passes through to the individual income tax return.

Net operating loss for corporations is a different type of loss, and not included in this article.

Calculating a Net Operating Loss

The loss from your business is only one part of the net operating loss calculation. For calculation purposes on your personal tax return (Form 1040):

  • Calculate Adjusted Gross Income (line 37 of Form 1040)
  • Subtract standard or itemized deductions, whichever is applicable.
  • The resulting amount, on Line 41, is the net operating loss.

From this point, it gets complicated. Some types of deductions are excluded from the calculation of net operating loss. You can see the entire calculation on IRS Form 1045, specifically Schedule A.  Note that the title "Tentative Refund" means a "quick refund" by means of a loss carry back.

Moving a Net Operating Loss to Minimize Taxes

A net operating loss in one year can be used to minimize tax profits in one or more years. 

Net operating losses may be carried back (used to offset profits in previous years) a specific number of years, or carried forward (used to offset profits in future years) depending on IRS regulations in effect at the time of the loss.

See this article which explains tax carryback and tax carry forward provisions and how they work. 

For more details on Net Operating Loss, limitations and calculations, see IRS Publication 536.