In the first years of opperation it is not uncommon that business costs and expenses are more than taxable income. In other words, you have a loss for the year. Sometimes, the loss qualifies as a net operating loss (NOL), and you can take a deduction for the loss on your federal income tax return in other years.
However taking the NOL tax deduction isn’t a simple matter. Once you’ve determined the amount of your NOL, you need to figure out when and how to take the deduction. Carryback and carryforward rules, are known together as “carryover” rules. These rules are outlined in IRS Publication 536.
You may have a NOL if you have a negative number on:
Line 41, Form 1040, which, for non-corporate taxpayers like individuals and sole proprietorships, shows your taxable income after you’ve taken your itemized or standard deduction. […]