Calculating Your Net Operating Loss (Page Four)

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Some online resources related to this topic IRS Publication 536, Net Operating Losses IRS Instructions for Form 1045 (HTML format) IRS Form 1045 (PDF format)

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Form 1045 Schedule A Line 6 Non-Business Deductions

Line 6 gets a real excoriation from me.  Whoever thought that this way of representing what they are trying to accomplish was a good thing, should be taken out behind the barn.  Here is what line 6 is trying to say in plain English: On the first page of your 1040, there is a section called "Adjusted Gross Income" which is used to reduce your Form 1040 line 22 "total income" by various things to arrive at your Form 1040 line 37 "adjusted gross income".  Some of those reduction amounts, we are going to consider to be business expenses, and some of them we are not.  However since they all went into your adjusted gross income, then we have to add back in those items we're not considering to be business-related.

Instead of the absolutely bizarre way they explain this in Publication 536, I give a very simple way below in a  table, where BR means "business related" and NBR means "not business related"

Form 1040 line-item	Line Item Description	BR	NBR
23	Archer MSA Deduction		X
24	Certain business expenses of...	X
25	Health Savings Account Deduction		X
26	Moving Expenses	X
27	One-half of Self Employment Tax	X
28	Self-employed SEP, SIMPLE, and...		X
29	Self-employed health insurance deduction	X
30	Penalty on early withdrawal of savings		X
31	Alimony paid		X
32	IRA deduction		X
33	Student loan interest deduction		X
34	Jury duty pay you gave to your employer		X
35	Domestic production activities deduction	X

What they should have done, is simply use a table like the above, and say "transfer your amounts from your 1040 into this table".  Then "add up each column".  Wouldn't that have been so much simpler?

In addition to all this, business-related deductions on your Form 1040 Schedule A include only : state income tax on business profits (Form 1040 Schedule A line 5), casualty and theft losses (Form 1040 Schedule A line 19), and un-reimbursed business expenses (Form 1040 Schedule A line 20).  The remainder of your Form 1040 Schedule A deductions are non-business deductions.  So add them all in here now too.

Let me just say here, that for the majority of people, after going through this exercise, what you'll end up with here on Line 6 is simply the same as your "Itemized Deductions" from your Form 1040 Line 40.  Isn't it sounding a bit like they should explain what you can use instead of what you can't?  In fact, later, should this article prove popular, perhaps we'll go through the mathematics and see if we can create a much simpler formula for how to calculate Lines 6 and 7 directly from other entries in your return. simply by adding, without all this subtracting!


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