How to Carry Over Business Expenses

You can deduct money you spend on your business if the expense is "ordinary and necessary," in the words of the Internal Revenue Service. Expenses are ordinary if they're a standard practice in your industry. They're necessary if they're helpful and appropriate in your work, even if they're not absolutely indispensable. If you have a net operating loss, you can wipe out the tax on your business income. You also get to lower the tax bill for an earlier tax year or a tax year to come.


Step 1

Record your net income for the year on Line 41 of your 1040 form. If your income is negative, that doesn't mean you have a net operating loss. The IRS excludes certain deductions and won't allow you to carry them over.

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Step 2

Complete IRS Form 1045, Schedule A, using the figures you've recorded on your other forms. You use Schedule A to separate business expenses you can carry over from non-business deductions and other write-offs that you cannot. That tells you how much of your negative income is an actual net operating loss.


Step 3

Look up last year's tax returns. If you reported business income, file a 1045 or 1040x form, claiming this year's net operating loss as a deduction from last year's income. If your loss is larger than the previous year's income, you can credit your loss against the past two years or in some special circumstances go even further back.



Step 4

Record any net operating loss you have left after carrying the loss back for two years. When you make out next year's 1040, report the loss on the line for "other income" and deduct it from next year's positive income. Include a statement explaining the reason for the loss and detailing how you calculated the amount.

Things You'll Need

  • Tax form 1040

  • Tax form 1045

  • 1045 Schedule A


If you don't have any business income last year, you can waive the carryback and credit your entire loss to next year's tax bill. If you carry back your loss, readjust any deductions for last year that were affected by your total income -- such as medical expenses greater than 7.5 percent of your adjusted gross income. If you carry back a $15,000 operating loss and deducted that from your income, the 7.5 percent figure is now lower. That lets you claim more of your medical bills.

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