A conceptual approach to the individual NOL deduction

Because of poor economic conditions over the past few years, many taxpayers are facing the prospects of net operating losses (NOL), making it more important than ever for CPAs to understand the relevant provisions in the tax code and opportunities for tax planning. A conceptual approach to computing NOLs can illuminate alternatives to an approach oriented on the IRC. The NOL rules for individuals are more complex than those for corporations. Individuals have numerous nonbusiness (personal) transactions in addition to the business transactions reflected on their tax returns. To the extent that these nonbusiness transactions reduce taxable income, they are removed from taxable income in order to determine any business economic loss or the NOL. When an NOL is about to be or has been incurred, taxpayers should consider its potential implications. The generation of an individual NOL, as well as its carry-back, can cause permanent loss of the tax benefits of nonbusiness deductions.