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weird little NOL issue -- tied to Schedule A charity?

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    weird little NOL issue -- tied to Schedule A charity?

    Asking forgiveness in advance for not trying to research this, I run into so few NOLs I only have a general understanding but don't know the details by heart. Hoping someone who deals with them more often knows the answer from memory.

    Taxpayer has a variety of income sources for 2017 (interest, pension, business, Line 21, plus adjustments for SEHI and SE tax). AGI is about $35K. Schedule C business has net profit of about $1,800. Due primarily to mortgage, and paying some property tax before year-end, Schedule A is a little over $35K, so before exemption deduction, taxable income is already a little less than zero. I'm not concerned about under-reported income, as a large life insurance payout was received so taxpayer has plenty of money to pay bills.

    Unexpectedly, an NOL of $50 (federal only) pops up with the return. Since the tax benefit of a $50 deduction will be so small compared to my fee for preparing the form and electing to carrying forward to next year, taxpayer is willing to forgo reporting it. No other tax benefit will be involved (remember income tax is already zero), so it's not like gaming the EIC or anything.

    I scratch my head, as to why a profitable business is generating an NOL, but I reduce Schedule C expense by $50 as a test, and the NOL remains the same. After doing this several times, I look at the 1045 form and worksheet and decide instead to try reducing Schedule A by removing the charity deduction of about $1,200. The NOL disappears.

    So why does a Sched A charitable contribution affect whether or not there is an NOL?

    #2
    I'm guessing that changing the Schedule C income does not change the AGI. SE tax on the 1800 would be 127- for a net of 1673 that is allowed for SEHI deduction. $50 less income would also mean $50 less SEHI deduction so AGI would remain the same.

    Were any business assets sold at a loss?
    Last edited by kathyc2; 05-24-2018, 02:41 PM.

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      #3
      Originally posted by kathyc2 View Post
      I'm guessing that changing the Schedule C income does not change the AGI.
      Were any business assets sold at a loss?
      No, no other unusual income items. Just the four that I already mentioned: interest, pension, business, Line 21.

      Good catch on the SEHI keeping the AGI at a fixed number! I wasn't looking at that.

      So as a further test, I moved the SEHI to Schedule A medical expense only (which goes above AGI threshold for this taxpayer, so it matters). Now the NOL goes away. But as soon as I move the Schedule C net profit to zero, the $50 NOL pops up again. (with the charity amount still in Schedule A). Then, if I remove the charity from Schedule A, the NOL this time does NOT go away.

      I'm still puzzled how a $0 net profit in business yields a $50 net operating loss. I know some of the items on Schedule A can be considered "not nonbusiness".

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        #4
        Originally posted by Rapid Robert View Post
        No, no other unusual income items. Just the four that I already mentioned: interest, pension, business, Line 21.

        Good catch on the SEHI keeping the AGI at a fixed number! I wasn't looking at that.

        So as a further test, I moved the SEHI to Schedule A medical expense only (which goes above AGI threshold for this taxpayer, so it matters). Now the NOL goes away. But as soon as I move the Schedule C net profit to zero, the $50 NOL pops up again. (with the charity amount still in Schedule A). Then, if I remove the charity from Schedule A, the NOL this time does NOT go away.

        I'm still puzzled how a $0 net profit in business yields a $50 net operating loss. I know some of the items on Schedule A can be considered "not nonbusiness".
        Other than state taxes on A being allocated to business income, I don't see where A items would have an effect.

        When you are playing around with charity deductions, does the change make line 41 positive?

        Pro has a NOL class worksheet that shows the allocation between business and non-business. Your software may have something similar.

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