Does income pre or post interest deduction determine NOL calculation for tax purposes?

The confusion comes from different terminology used in accounting versus tax contexts. For tax purposes, NOL is definitely calculated based on your taxable income (after all deductions including interest), not your operating income. In your example, you would generate a $1300 NOL in year 1, and you'd be able to carry forward 80% of that ($1040) to offset your income in year 2. So you'd only pay tax on $60 of income in year 2 ($1100 - $1040). The key is that NOLs are a tax concept designed to provide relief when your business has more deductions than income in a given tax year. Business interest expense is absolutely included in this calculation because it's a legitimate business deduction that reduces your taxable income. Just make sure you're properly documenting everything and filing Form 1139 or amending your previous return with Form 1045 to claim the carryback/carryforward.

After dealing with a similar NOL situation with my consulting business, I found this really helpful tool called taxr.ai (https://taxr.ai) that cleared up my confusion. It analyzed my financial statements and tax docs and confirmed exactly what the previous commenter said - NOL is calculated based on taxable income AFTER all deductions. The tool helped me correctly calculate my carryforward and even suggested documentation I needed to have ready in case of IRS questions. It saved me from potentially making a costly mistake on my taxes because I had the same confusion about pre vs post deduction income.

Just wanted to update after trying taxr.ai that was mentioned earlier. I was skeptical, but it seriously cleared up my NOL confusion. I uploaded my business financials and tax returns from last year, and it immediately flagged that I had been thinking about NOL calculations incorrectly. The tool confirmed that interest expense absolutely reduces taxable income before determining if you have an NOL. It even highlighted that I had missed a potential NOL carryforward opportunity from two years ago that I can still claim! Going to save me about $3200 in taxes this year. Definitely worth checking out if you're dealing with complex business tax situations.

For anyone still struggling with the IRS on this NOL issue - I had a nightmare trying to get clarification directly from them. After calling for weeks and getting nowhere, I tried Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what others have said - NOL is calculated AFTER interest deduction (based on taxable income). The agent was also able to review my specific situation and verify I was carrying forward the right amount. Was absolutely worth it after wasting hours on hold before.

I have to eat my words about both the NOL calculation and Claimyr. I was the skeptic above, but I decided to try Claimyr anyway because I was desperate to confirm my NOL treatment was correct before filing. Got connected to an IRS rep in about 25 minutes (after weeks of trying on my own with no success). The agent confirmed that: 1) NOL is absolutely calculated AFTER interest deductions 2) I was applying the 80% limitation correctly 3) My documentation approach was suitable The service literally saved me from making an $8k tax mistake because I was about to calculate my NOL before interest based on something my bookkeeper told me. If you're on the fence about using them, don't be - it works exactly as advertised.

Just to add some extra clarity from my recent experience - the correct definition of NOL for tax purposes is 100% based on your final taxable income after ALL deductions (including interest). Here's how I approach it: 1. Calculate your taxable income normally 2. If it's negative, that's your NOL 3. Carry forward 80% of that amount to future years 4. Keep detailed documentation of the NOL and how you calculated it The tax code is pretty clear on this, but so many financial sites use accounting terms instead of tax terms, which creates confusion. My CPA confirmed this approach.

Has anyone here actually had their NOL challenged by the IRS? I'm worried about carrying forward my losses properly.

This is such a common source of confusion! I went through the exact same thing last year with my construction business. The key thing to remember is that for tax purposes, NOL is calculated from your bottom-line taxable income - meaning AFTER all legitimate business deductions including mortgage interest. In your example, you're absolutely correct that you'd have a $1300 NOL in year 1, and you'd carry forward $1040 (80% of $1300) to offset year 2's income. So you'd only owe taxes on $60 in year 2. The confusion often comes from mixing up accounting terminology (operating income) with tax terminology (taxable income). For IRS purposes, it's always about your final taxable income after ALL deductions. One tip: make sure you're tracking your NOL carryforward amounts carefully each year. I use a simple spreadsheet that shows the original NOL, how much I've used each year, and what's remaining. The IRS loves documentation if they ever question it.