Corporation Tax on Losses: Carryforward, Carryback, and Ownership Change

When a C corporation’s deductible expenses exceed its gross income for the year, the shortfall is a net operating loss, and federal tax law lets the corporation turn that loss into tax savings. Corporation tax on losses works in three layers: the loss first offsets other income on the same year’s return, then any remaining loss carries forward indefinitely to reduce future taxable income by up to 80 percent per year, and in a narrow set of cases the loss can be carried back to recover taxes already paid.¹

What a Net Operating Loss Is

The tax code defines a net operating loss as the amount by which a corporation’s allowable deductions exceed its gross income for the year, with certain modifications.² A corporation with $500,000 in revenue and $700,000 in deductible expenses has a $200,000 NOL. That number is the starting point for every strategy below.

The computation happens on Form 1120. Line 28 shows taxable income before any NOL deduction, and line 29a is where the corporation claims a deduction for an NOL carried in from a prior year.³ Overstating the loss understates the tax, and the IRS treats those errors as accuracy failures rather than paperwork slips.

How the Current-Year Return Handles Losses

A C corporation calculates one taxable income number. Sales, rents, interest, and capital gains all flow into the same pool, and every deductible cost pulls from that pool. The result faces the flat 21 percent federal corporate rate.⁴

So if the operating business loses $100,000 while a rental property earns $50,000, the return shows a $50,000 loss overall. No election is needed. The netting is just how Form 1120 is built. Only what remains after that netting becomes an NOL available for other years.

Carrying the Loss Forward

For NOLs arising in tax years that began after December 31, 2017, the carryforward is unlimited. The loss never expires.¹

The catch is an annual cap. The NOL deduction in any future year is limited to 80 percent of that year’s taxable income, computed without the NOL deduction itself and without the deductions under sections 199A and 250.⁵ A corporation carrying a $250,000 loss into a year of $200,000 in taxable income can use only $160,000 of the loss. The other $90,000 rolls forward. The remaining 20 percent of taxable income stays taxable each year, which is the trade Congress made in exchange for the indefinite life.

Older losses follow older rules. NOLs that arose before January 1, 2018 can offset 100 percent of taxable income but expire 20 years after the loss year.¹ A corporation sitting on both vintages should generally use the older ones first, before the clock takes them.

When a Loss Can Be Carried Back

For most corporations, carrybacks no longer exist. The Tax Cuts and Jobs Act eliminated the general two-year carryback for losses arising after 2017. Two exceptions remain:

Farming losses. The portion of an NOL classified as a farming loss can be carried back two years.⁵
Non-life insurance companies. Property and casualty insurers keep a two-year carryback, though their carryforward is capped at 20 years rather than being indefinite.¹

A carryback recalculates the prior year as if the loss had reduced that year’s income, and the overpayment comes back as a refund. For a business squeezed on cash, this is the fastest route from a loss to money in the bank.

Form 1139 vs. Form 1120-X

A corporation with a qualifying carryback chooses between two filings, and they behave very differently.

Form 1139, the Application for Tentative Refund, is the fast track. It has to be filed within 12 months after the end of the loss year, and the IRS is required by statute to process it within 90 days. The refund is tentative, though, not a formal refund claim. If the IRS later disallows it, the corporation cannot sue on the Form 1139 denial and must file an amended return to preserve its rights.⁶⁷

Form 1120-X, the Amended Corporation Income Tax Return, is slower but preserves the corporation’s litigation rights. The deadline is three years from the due date of the loss-year return. The IRS has no statutory processing deadline, but the corporation can file suit if the claim sits for more than six months.⁷

A carryback also reopens the prior year for IRS review. The agency can assess additional tax on items connected to the carryback even after the original statute of limitations for that year has run.

Losses Inside a Corporate Group

When one subsidiary loses money while another earns it, a consolidated return lets the group net the results. A parent and its qualifying subsidiaries file a single Form 1120 as if they were one taxpayer.⁸ The subsidiary’s loss reduces the group’s combined taxable income dollar for dollar in the same year, no waiting required.

To qualify as an affiliated group, the parent has to own stock representing at least 80 percent of the total voting power and at least 80 percent of the total value of each subsidiary in the chain.⁹ The election generally binds the group in future years unless the IRS grants permission to break it.

How an Ownership Change Affects Accumulated Losses

Accumulated NOLs make loss corporations attractive to buyers, and Section 382 limits that appeal. When a corporation goes through an ownership change, the amount of its pre-change NOLs it can use each year afterward is capped.

An ownership change occurs when shareholders each owning at least 5 percent of the stock collectively increase their ownership by more than 50 percentage points over a rolling three-year window. Mergers, acquisitions, new stock issuances, and some restructurings can cross that line. Once it is crossed, the annual cap on using pre-change NOLs equals the value of the corporation immediately before the change, multiplied by the IRS-published long-term tax-exempt rate for that month.¹⁰ For ownership changes in early 2026, that rate is 3.51 percent.¹¹

A corporation with $100 million in accumulated NOLs, acquired for $50 million in equity value, would be capped at roughly $1.76 million per year in pre-change NOL use ($50 million times 3.51 percent). Losses generated after the ownership change are not subject to the Section 382 cap, but the pre-change stockpile may take decades to work off, and any of it left unused when the carryforward window closes is gone.

Records, Deadlines, and Penalties

The general statute of limitations for claiming a refund is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. A return filed before its due date is treated as filed on the due date.¹² Miss that window and the refund is forfeited, however legitimate the underlying loss.¹³

Any corporation carrying NOLs forward should keep a running schedule that tracks the year each loss arose, its original amount, how much has been used in each later year, and the current balance. The IRS can examine any year in which a carryforward deduction is claimed. Without records showing how the loss was calculated and how it has been drawn down, the deduction can be denied. Keep the general ledger, financial statements, prior returns, and NOL schedules for at least three years after the last return that uses any part of the loss.

Overstating an NOL that later gets corrected triggers the accuracy-related penalty, generally 20 percent of the resulting underpayment where the error is due to negligence or a substantial understatement of income tax.¹⁴

Two Boundaries Worth Knowing

A federal NOL does not necessarily zero out every corporate tax bill. Corporations that average more than $1 billion in annual adjusted financial statement income face the 15 percent Corporate Alternative Minimum Tax, which is calculated on book income rather than taxable income, so an NOL that eliminates regular tax may still leave a CAMT liability.¹⁶¹⁷

State income tax rules also often diverge from the federal NOL regime. Some states shorten the carryforward period, cap the deduction at a lower share of income, or refuse carrybacks even for farming losses. A corporation operating in multiple states needs to track its NOL balances separately for each jurisdiction.

1
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
2
Office of the Law Revision Counsel. 26 US Code 172 – Net Operating Loss Deduction
3
Internal Revenue Service. US Corporation Income Tax Return – Form 1120
4
Worldwide Tax Summaries. United States – Corporate – Taxes on Corporate Income
5
Internal Revenue Service. Instructions for Form 172
6
Office of the Law Revision Counsel. 26 USC 6411 – Tentative Carryback and Refund Adjustments
7
Internal Revenue Service. Instructions for Form 1139
8
Office of the Law Revision Counsel. 26 US Code 1501 – Privilege to File Consolidated Returns
9
Office of the Law Revision Counsel. 26 USC 1504 – Definitions
10
eCFR. 26 CFR 1.382-5 – Section 382 Limitation
11
Internal Revenue Service. Revenue Ruling 2026-2
12
Internal Revenue Service. Time You Can Claim a Credit or Refund
13
Office of the Law Revision Counsel. 26 US Code 6511 – Limitations on Credit or Refund
14
Internal Revenue Service. 26 US Code 6662 – Imposition of Accuracy-Related Penalty
16
U.S. Department of the Treasury. US Department of the Treasury Releases Proposed Rules for Corporate Alternative Minimum Tax
17
Office of the Law Revision Counsel. 26 US Code 55 – Alternative Minimum Tax Imposed