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If you are a sole proprietor, and in the process of completing your tax return you find that you have a negative number on Line 41 of your 2011 Form 1040, U.S. Individual Income Tax Return (the line showing your taxable income after all itemized deductions), you may have a net operating loss (NOL) that may potentially be carried over to other years. If so, the year of your tax return will be called your "NOL year."
The first step is to determine whether or not you have a deductible NOL. Schedule A of Form 1045, Application for Tentative Refund, should be used to compute the amount of your NOL.
This can become complicated, because a number of things that are ordinarily deductible on your tax return cannot be deducted for purposes of determining whether you actually have an NOL: personal exemptions for yourself, spouse, and dependents; net capital losses, which are subject to different carryover rules; nonbusiness losses; NOL deductions from other years; and nonbusiness deductions such as alimony, medical deductions, charitable deductions, real estate tax on your residence, deductible IRA contributions, or the standard deduction if you don't itemize. The instructions to Form 1045 will help you to work through the computation.
Once you have determined the existence and amount of your NOL, you can determine how to claim it.