The term “net operating loss” is defined as the “excess of deductions over gross income”. This excess of deductions over gross income is subject to modifications which limit the net operating loss to only business losses.
A loss reported on a tax return by an individual taxpayer with business income is modified in the following ways in order to determine a net operating loss deduction:
Start with taxable income or loss
+ Any NOL deduction from another year
+ Deductions for personal and dependency exemptions
+ Non-business capital losses exceeding non-business capital gains
+ Non-business deductions in excess of non-business income
= Net operating loss
Non-business deductions include all itemized deductions plus self employed retirement plan contributions. Non-business income is all income not derived from a trade or business, such as dividends, interest, and non-business capital gains. Salary and wages are considered to be trade or business income for purposes of computing an NOL.