If you find that your net income at the end of this year is in the negative numbers, you can get some benefit from that loss on your taxes. George Patrick, agricultural economist at Purdue University, illustrates how you can take a Net Operating Loss (NOL) and carry it back to other tax years for a refund.

To illustrate, assume a married couple has a 1999 Schedule F loss of $45,000 and a gain of $3,000 from the sale of breeding stock reported on Form 4797. With no other income or deductions, their 1999 adjusted gross income would be a negative $42,000. If they claimed the $7,200 standard deduction and the personal exemption of $2,750 each, their 1999 taxable income would be a negative $54,700, However, their 1999 NOL would be limited to their adjusted gross income at a negative $42,000.

Further assume that in 1997 (the two-year carryback year), they had an adjusted gross income of $25,000, while their 1994 (the five-year carryback year) adjusted gross income was $50,000. In this case, they should carry their 1999 NOL back to 1994.

On their 1994 return they would have subtracted the 1994 standard deduction of $6,350 and personal exemptions of $4,900 (two times $2,450) to determine their 1994 taxable income of $38,750 and income tax liability of $6,010. After the $42,000 NOL carryback, their 1994 modified adjusted gross income would be $8,000. Although their 1994 standard deduction and personal exemptions total $11,250, their taxable income can be reduced only to $0. The tax benefits of the extra $3,250 ($11,250 minus $8,000) deductions would be lost.

However, by carrying the 1999 NOL back to 1994, the couple will receive a refund of their entire 1994 income tax of $6,010.