1.26 Ark. Code R. 51-427
The net operating loss carryover (NOL) is the excess of allowable deductions over gross income derived from a trade or business for the taxable year. This loss may be carried over to the next succeeding taxable year and annually thereafter for a total period of three (3) years, succeeding the year of the year of the net operating loss, if the loss occurred in an income year before January 1 1987, and five (5) years if the loss occurred on or before January 1, 1987, or if the loss has been exhausted or absorbed by the taxable income of any succeeding year, whichever is earlier. The NOL must be carried forward in the order named above.
Taxable income as used in the paragraph above is the amount realized after the deduction of personal itemized deductions from the adjusted gross income (AGI), and if no itemized deductions, then taxable income will be the same as the AGI. The NOL calculated from a qualified previous year may be exhausted or absorbed in part by this amount.
The NOL must be reduced by all non-taxable income, less any expenses properly and reasonably incurred in earning non-taxable income, not required to be reported as gross income.
Non-taxable income includes, but is not limited to, the first six thousand dollars ($6,000.00) of military pay or retirement, the first six thousand dollars ($6,000.00) of a public or private employment - related retirement or disability system, and any other income that is exempt under ACA 26-15-404.
Gross income is the total income of all items listed, except an NOL, on the lines of the individual returns and before any adjustments are considered.
Gross income not derived from a trade or business is also known as non - business income. Non - business income includes, but is not limited to, personal savings interest, dividends, annuity distributions, endowments, and non - taxable income not required to be reported. Non - business deductions are those expenses incurred during the year and reported on the itemized deduction schedule with the exception of unreimbursed employee expenses.
In the case of a taxpayer other than a corporation, non - business deductions shall be eliminated from the deduction otherwise allowable for the taxable year to the extent that they exceed non - business income. Personal exemptions and credit for dependents shall not be a deduction for the purpose of computing a net operating loss.
EXAMPLE 1: Mr. Smith reported the following income items on his 1995 tax return:
Wages.............................................. | $ 5,000.00 |
Interest............................................. | $ 500.00 |
Business (Sch. C) ........................... | ($ 25,000.00) |
Capital Gain.................................... | $ 2,000.00 |
Farm (Sch. F).................................. | ($ 15,000.00) |
Pension............................................ | $ 6,000.00 |
IRA Distribution............................. | $ 2,500.00 |
Other items on Mr. Smith's tax return include forfeited interest penalty on premature IRA withdrawal of $50 and itemized deductions consisting of mortgage interest, contributions and miscellaneous deductions totaling $8,000.
Adjusted gross income (AGI) for Mr. Smith is ($30,000) and taxable income is ($38,050) calculated as follows:
NET OPERATING LOSS (Net Non-Business Income - Net Business Loss)......($ 32,050.00)
EXAMPLE 2: Same information as Example 1 except Itemized Deductions are $10,000 and includes a $2,000 deduction for Unreimbursed Employee Expenses.
AGI equals ($30,050) and taxable income equals ($40,050) computed as follows:
NET OPERATING LOSS (Net Non-Business Income - Net Business Loss)......($ 34,050.00)
1.26 Ark. Code R. 51-427