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Net operating loss (NOL) deduction - Applying prior-year NOL to current-year income

Overview

If you reported a net operating loss on a previous Indiana return using Schedule IT-40NOL, you can use it to reduce your current year's Indiana Adjusted Gross Income. This loss is reported as a deduction on either Schedule 2 or Schedule C of the current return. However, Indiana requires you to use the state's own calculations to figure out the deduction amount, which is different from federal calculations. You'll also need to find out how much of the previous year's net operating loss you've already used to reduce Indiana AGI in the past. Make sure to include a copy of Schedule IT-40NOL for each year you claim a loss when you submit your current year's return.
Data Entry
If you're filing resident returns for tax years 2004 or later, starting with the original loss year, enter all relevant income details into the
Income
 section on the
INNOL-2
 screen. Make sure to fill in the right sections for each loss year and all years in between. The system will transfer the information from the previous years to the
INNOL-2
 screen. If you didn't enter the details in the versions for previous years, you'll need to enter certain amounts for each year.
  • Code 12 - Amount from federal Form 1045, Schedule A-NOL
    . Enter the amount (losses as negative and gains as positive) from the last line of the schedule for the corresponding year.
  • Code 13 - Amount from IT-40, line 1
     from the corresponding year.
  • Code 18 - Exemptions
  • Deductions
     (Select from the dropdown to enter any that apply to the tax year)
  • Add-Backs
     (Select from the dropdown to enter any that apply to the tax year)
How the information on the INNOL-2 screen is used
The information on the
INNOL-2
 screen is used for the following purposes:
  • To determine Indiana AGI (as defined by Indiana tax law) in prior years. The calculation is shown via the NOL carryover worksheets.
  • To determine if the taxpayer had prior-year NOLs. Schedule IT-40NOL is made for prior-loss years.
  • To determine the amount of prior-year Indiana NOLs already used as a deduction against prior year Indiana AGI and the amount available to use as a deduction to offset current-year (or future) Indiana AGI. The calculation is shown via the NOL carryover worksheets and Schedule IT-40NOL.
In the Adjust and Income sections on the
INNOL-2
 screen, certain components of income from the dropdown are used solely for determining whether or not taxpayer had an Indiana NOL during the tax year. Other components of income are used solely for determining the Indiana AGI for the tax year. Some components are used for both purposes.
If a taxpayer has an Indiana net operating loss carryforward from the prior years, it's important to enter all components of income for each loss year and each intervening year to determine Indiana AGI and/or Indiana net operating loss for each year. If the Indiana return was prepared in last year’s version, the pertinent information transfers forward to next year's
INNOL-2
 screen.
Order in Which NOL Must be Applied
Per guidance from the Indiana Department of Revenue, Indiana requires any NOL carryover amounts to be used as soon as there's Indiana AGI available to absorb them. A taxpayer may not skip a year.
Resubmission of Schedule IT-40NOL Required
The Indiana Department of Revenue requires taxpayers to show calculations of net operating loss in the year the loss was incurred as well as in the year the carryover amounts are applied to (the year in which NOL deduction is claimed).
Federal NOL Deduction may Not be Claimed on Indiana Return
As Indiana requires its own calculations for net operating losses, any deduction to federal AGI for federal NOL carryover (claimed on federal Form 1040, Schedule 1) is reported on Schedule 1 of the Indiana resident return as an add-back to federal AGI for purposes of determining Indiana AGI and Indiana taxable income.
NOL
Carryforward is Applied Against Indiana Adjusted Gross Income, not Indiana Taxable Income
In some cases, upon initial review it appears that NOL carryforward instead of current-year deductions is being used unnecessarily to offset current-year income. A subtle but important point is that Indiana net operating loss carryforward is applied against Indiana Adjusted Gross Income, not Indiana Taxable Income.
Typically, Indiana Adjusted Gross Income (as defined by Indiana tax law) is greater than Indiana taxable income. However, an amount for Indiana Adjusted Gross Income as computed from the “Intervening Year” perspective, which denies certain deductions, does not actually appear on Indiana Form IT-40. (There is an amount for Indiana Adjusted Gross Income on Form IT-40, but it is calculated more favorably than the Indiana Adjusted Gross Income computed on the NOL Carryforward Worksheets with respect to absorbing prior year NOLs.) Thus, the amount for Indiana AGI is computed via the NOL carryover worksheets; then the NOL carryforward amount is applied against Indiana AGI (not taxable income). Note that there are several deductions that are used to determine Indiana Taxable Income but are not used to determine Indiana Adjusted Gross Income.
Prior-year Indiana AGI amounts are calculated based on data entry on the
INNOL-2
 screen. The current-year Indiana AGI amount is calculated based on data entry for the current-year federal and Indiana returns.

This article applies to:

  • Product: UltraTax CS
  • Return type: 1040 Individual
  • State: Indiana

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