Quick Answer
A net operating loss (NOL) occurs when a business's tax deductions exceed its taxable income in a given year. Under current IRS rules (post-TCJA), most NOLs can only be carried forward indefinitely—they can no longer be carried back. Additionally, NOL carryforwards are limited to offsetting no more than 80% of taxable income in any future year. Small businesses should track NOLs carefully to maximize future tax savings.
What Is a Net Operating Loss?
A net operating loss (NOL) arises when a business's allowable deductions exceed its gross income for a tax year. This is common for startups, seasonal businesses, and companies experiencing economic downturns. Rather than losing the tax benefit of those excess deductions, the IRS allows businesses to apply the loss to other tax years—reducing taxable income and generating tax refunds or lowering future tax bills.
NOLs provide critical tax relief for businesses that operate at a loss in their early years or face temporary setbacks. Understanding the current NOL rules is essential for effective tax planning. For related concepts, see our guide on deferred tax temporary and permanent differences.
How NOLs Work: Carryforwards and Carrybacks
The tax code allows businesses to use NOLs in two ways:
- NOL carryforward: Apply the loss to future tax years, reducing taxable income in those years
- NOL carryback: Apply the loss to prior tax years, generating a refund of taxes previously paid
The availability of carrybacks depends on the tax year and specific provisions. The rules have changed significantly over the years, and understanding which regime applies to your NOL is critical.
NOL Rules After the Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act of 2017 made major changes to NOL rules for tax years beginning after December 31, 2017:
- No carryback allowed: NOLs arising in tax years after 2017 generally cannot be carried back to prior years (with exceptions for farming losses and certain disaster losses)
- Indefinite carryforward: NOLs can be carried forward indefinitely—there is no 20-year expiration
- 80% income limitation: NOL carryforwards can offset no more than 80% of taxable income in any single future year. The remaining 20% is still taxable
These changes mean that businesses can no longer fully zero out taxable income using NOL carryforwards. The 80% limitation ensures that even profitable years with large NOL carryforwards generate some current tax liability.
NOL Rules Before the TCJA
For NOLs arising in tax years before 2018, different rules apply:
- 2-year carryback, 20-year carryforward: NOLs could be carried back 2 years and carried forward up to 20 years
- No 80% limitation: NOLs could fully offset taxable income in carryback or carryforward years
If your business has pre-2018 NOLs that haven't been fully used, they remain subject to the old rules. You can still carry them forward for the remainder of the 20-year window, and they are not subject to the 80% limitation.
CARES Act Temporary Changes
The CARES Act of 2020 temporarily modified NOL rules for tax years 2018 through 2020:
- 5-year carryback: NOLs arising in 2018, 2019, or 2020 could be carried back up to 5 years
- 80% limitation suspended: For 2018–2020, NOLs could offset 100% of taxable income (the 80% limit was temporarily removed)
These provisions allowed many businesses to claim refunds by carrying pandemic-era losses back to profitable pre-TCJA years. The temporary changes have now expired, and post-2020 NOLs revert to the TCJA rules (no carryback, 80% limit, indefinite carryforward).
Calculating an NOL
An NOL is generally the excess of business deductions over gross income. However, certain modifications apply:
- Non-business income: Capital gains, dividends, and other investment income are generally excluded from the NOL calculation
- Non-business deductions: Itemized deductions that are not business-related are limited to non-business income
- Section 179 expense: Must be added back to the extent it created or increased the NOL
- NOL deduction itself: Any NOL deduction from a prior year is added back when computing the current year NOL
Form 1040 Schedule A (for sole proprietors) or the corporation's tax return workpapers are used to compute the NOL. For help with tax deductions more broadly, see our tax deductions guide for small business.
How to Claim an NOL Carryforward
To claim an NOL carryforward, the business must:
- Compute the NOL for the loss year using the IRS modifications
- File Form 1045 or an amended return if carrying back (only available for pre-2018 NOLs or disaster/farming losses)
- Track the NOL on a separate schedule, noting the year generated and amounts used each year
- Report the NOL deduction on the appropriate line of the tax return in carryforward years
For corporations, the NOL is reported on Form 1120, Line 29a. For sole proprietors, it flows through Form 1040. Partnerships and S-corporations generally cannot use NOLs at the entity level—instead, the loss passes through to the owners, who may generate individual NOLs. For more on entity-level tax issues, see our self-employment tax guide for small business.
The 80% Limitation: A Practical Example
Example: A small business has a $200,000 NOL carryforward from 2024. In 2025, the business has $150,000 of taxable income before the NOL deduction.
- The NOL can offset up to 80% of $150,000 = $120,000
- Taxable income after NOL = $150,000 − $120,000 = $30,000
- Remaining NOL carryforward = $200,000 − $120,000 = $80,000 (carried to 2026 and later)
The business still pays tax on $30,000, even though it has $80,000 in unused NOL. This limitation is a key difference from pre-TCJA rules, which would have allowed the full $150,000 offset.
NOLs and Business Ownership Changes
Under IRC Section 382, when a corporation undergoes a more-than-50% ownership change (such as a new investor acquiring a controlling stake), the annual NOL carryforward limit is restricted. The limit equals the value of the corporation's stock immediately before the ownership change multiplied by the long-term tax-exempt rate.
This anti-abuse provision prevents the acquisition of loss corporations solely for their NOLs. Small businesses seeking outside investment should be aware that a significant equity round could trigger Section 382 limitations. For related tax planning considerations, see our tax credits guide for small business.
NOL Record-Keeping Best Practices
Proper NOL tracking is essential for maximizing tax benefits. Businesses should:
- Maintain a detailed NOL schedule showing each year's loss, the amounts used, and remaining balances
- Distinguish between pre-2018 NOLs (20-year carryforward, no 80% limit) and post-2017 NOLs (indefinite carryforward, 80% limit)
- Document any CARES Act carryback claims and resulting IRS correspondence
- Monitor Section 382 ownership changes that could limit annual NOL usage
- File Form 1139 (corporations) or Form 1045 (individuals) for carryback refund claims within the required timeframes
If your business received an NOL-related refund or has complex carryforward calculations, consider working with a tax professional. For overall compliance deadlines, check our tax compliance calendar guide for small business.
Key Takeaways
- Post-TCJA NOLs (2018 and later): indefinite carryforward, no carryback, 80% income limitation
- Pre-TCJA NOLs (before 2018): 20-year carryforward, 2-year carryback, no 80% limit
- CARES Act allowed 5-year carrybacks for 2018–2020 NOLs (temporary, now expired)
- Section 382 limits NOL usage after major ownership changes
- Track each NOL year separately—different rules apply to different vintages of losses
- 80% limitation means you will always have some taxable income even with large NOL carryforwards
