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10863: 1040 - Net Operating Loss FAQs


1040 Individual Data Entry

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: 

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.

In Drake17 and prior:  

A net operating loss usually is carried back up to three preceding years to offset income there before it can be carried forward and used in a future year, unless the taxpayer makes an irrevocable election to carry it forward only. Three data entry screens and two worksheets deal with NOLs in a 1040 return:

NOL Data Entry Screens:

In TY 2015 and later, Form 1045 is 5 pages and Schedule A - NOL for TY 2015 and later is page 3. In prior years, Form 1045 was 4 pages and Schedule A was page 2.

  1. 1045 Screen. This screen is for the first two pages of Form 1045 Application for Tentative Refund, and 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 Schedule A that is page 3 of Form 1045 (page 2 in Drake14). Once you begin data entry here, the software generates all pages of Form 1045, unless you select 20YY NOL is being carried back later or outside of the software​ (in earlier software, Calculate 1045 page 2 only) at the top of the NOL screen. To waive carrying an NOL back and produce an ELECTION page to that effect, check the box Election to carry forward ONLY at the top of the NOL screen (this election can also be made on the ELEC screen in earlier software, but do not make the election in both places).
    1. Schedule A – NOL. This is for page 3 of Form 1045 (page 2 in Drake14).
      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. Check the box at the top of the NOL screen (20YY NOL is being carried back later or outside of the software​ or Calculate 1045 page 2 only in earlier software) to produce Schedule A by itself.
    2. Schedule B – NOL Carryover. This is for pages 4 and 5 of Form 1045 (pages 3 and 4 in Drake14).
      1. Schedule B is to carry back a current-year NOL.
      2. Complete Schedule B for the years the IRS requires you to carry back a current-year NOL.
      3. Clear the option at the top of the NOL screen 20YY NOL is being carried back later or outside of the software​ (Calculate 1045 page 2 only in earlier software) or the software will not produce Schedule B.
  3. LOSS screen.
    1. Shows what NOLs were generated and used in past years.
    2. Lets you correct or supply missing prior year NOL information. 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 worksheet (WK_CARRY in Drake15 and prior). This 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 (WK_NOL in Drake15 and prior) worksheet. This worksheet is what next year’s LOSS screen will look like when the return is updated, including the carryforward.
  3. Wks NOLCO (WK_NOLCO in Drake15 and prior) worksheet. This 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 1040NR (line 21 for 2018).

1040 Instructions:

Include on line 21 any NOL deduction from an earlier year. Subtract it from any income on line 21 and enter the result. If the result is less than zero, enter it in parentheses. On the dotted line next to line 21, enter “NOL” and show the amount of the deduction in parentheses. See Pub. 536 for details. 

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 (WK_NOL, WK_NOLCO, and WK_CARRY, respectively, in Drake15 and prior).

 

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.

For more information on NOLs, see Pub 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 7 minus line 8 (Form 1040, line 41 in Drake17 and prior). 
  • an NOL appears as a negative number on line 25.

Beginning in Drake14 Form 1045 Schedule A - NOL if either

  • There is an NOL, which appears on line 25 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.

Drake13 and earlier software produces Form 1045 Schedule A - NOL if either

  • You have selected Calculate 1045 page 2 ONLY on screen NOL.
  • Or you have selected Prepare as needed in the Form 1045 page 2 (NOL) field at Setup > Options > Form & Schedule Options and the income minus deductions 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. 

In Drake17 and prior:

To determine whether a current-year NOL will be carried forward to next year, in View mode, review the NOTES page. If NOTE 368 present, the current-year NOL will not be carried forward until you return to data entry and indicate how you want to handle it.

NOTE 368:

CURRENT-YEAR NOL PRESENT: A current-year NOL has been calculated on Form 1045, page 3, and you have not carried the NOL back using the rest of Form 1045. Return to screen NOL and indicate whether you will be performing a carryback outside of the software or electing to waive the carryback period and carryforward the current-year NOL.

You must eliminate NOTE 368 before a current-year NOL will be carried forward when you update the return next year. Eliminate the note by either: 

  • Completing screens 1045 and NOL to request a tentative refund of the NOL. A current-year NOL must be applied first to prior-year returns, normally three prior years. Completing these screens causes the software to calculate carryback and generate the refund request, making any remainder available for carry-forward, or
  • By Indicating either: 
    • The current-year NOL is being applied to prior years outside the software - that is, you have applied or will apply the NOL without further data entry in the software. The software then assumes the current-year NOL has been consumed by application to prior years and is not available for carryforward. (This assumption is also made whenever NOTE 368 is displayed.)
    • Or, the taxpayer is electing to carry the current-year NOL forward only. This selection makes the entire current-year NOL available for carryforward.

These selections are available on the NOL screen:

When these conditions are met, NOTE 368 is eliminated. If you have completed a Form 1045 refund request and there is a remainder, or if you have elected to carryforward only, any available carryforward loss appears on: 

  • worksheet Wks CARRY (WK_CARRY in Drake15 and prior). (The worksheet is displayed only if the Carryover worksheet  is enabled on the Setup > Options > Form & Schedule Options tab.) An amount displayed there under "Losses" includes a current-year NOL and any prior-year NOL available for carryover to next year:

  • and on next year's LOSS screen after you update a client next year (Last Year Data > Update Clients 20XX to 20YY).

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

In prior years of Drake Tax, you may have entered either carryback or carryforward NOL amounts on line 21 of screen 3 (Income).

Beginning with the 2014 software, enter only NOL carryback amounts on screen 3, line 21Use 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.

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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