A net operating loss carryback is available to only two kinds of taxpayers under current federal law: farming businesses and non-life insurance companies, both of which can carry a loss back two years. Everyone else lost the general carryback when the Tax Cuts and Jobs Act eliminated it for losses arising in tax years beginning after December 31, 2017. If you don’t fall into one of the two exceptions, your only option is to carry the loss forward.
What Happens if You Can’t Carry Back
For losses arising in tax years beginning after 2020, the default rule is straightforward: no carryback, indefinite carryforward.1Internal Revenue Service. Instructions for Form 172 – Net Operating Losses (NOLs) for Individuals, Estates, and Trusts The CARES Act temporarily reopened a five-year carryback for losses arising in 2018, 2019, and 2020, but that window has closed.2Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions
Carrying forward isn’t as immediate as recovering taxes you already paid, and there’s a ceiling on how much of a future year’s income the loss can wipe out. Post-2017 losses can offset no more than 80% of your taxable income in the year you apply them, calculated before the NOL deduction itself.3Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction If you have $500,000 in taxable income and $1 million in carried-forward losses, you can offset $400,000, and the remaining $600,000 rolls into the next year. Nothing expires, but a large loss takes time to consume.
Farming Loss Carryback
A farming business can carry its farming loss back two years and claim a refund of taxes paid in those earlier years.4Legal Information Institute. 26 USC 172 Qualifying farming activities include cultivating land and raising or harvesting agricultural or horticultural products.
The amount you can carry back isn’t automatically your full NOL. It’s the smaller of your total NOL for the year, or the NOL you’d calculate using only farming income and deductions.4Legal Information Institute. 26 USC 172 So if you run a farm and a separate retail operation, only the farm portion qualifies for the two-year carryback. Any non-farming loss still has to be carried forward.
The carryback is optional. You can elect to waive it and carry the entire farming loss forward instead, subject to the 80% cap. The election is attached to your return for the loss year by the due date including extensions, and once made it can’t be reversed.4Legal Information Institute. 26 USC 172 The decision usually turns on rates. If the tax you paid in the two prior years was at a lower bracket than you expect in future years, waiving the carryback and using the loss later recovers more money.
Non-Life Insurance Company Carryback
Non-life insurance companies keep a more generous set of rules than any other taxpayer. They can carry losses back two years and forward for up to 20 years.5Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction The 20-year carryforward cap is a holdover the Tax Cuts and Jobs Act specifically preserved for these companies even as it made carryforwards indefinite for others.
The larger benefit is that non-life insurance companies are exempt from the 80% taxable income limitation. Their losses can zero out taxable income in a given year with no floor.5Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Which companies count as non-life insurers turns on Section 816(a). That section defines an insurance company generally as one where more than half its business involves issuing insurance or annuity contracts or reinsuring risks. Life insurance companies meeting the additional thresholds in Section 816 are excluded from this carryback treatment.6Office of the Law Revision Counsel. 26 USC 816 – Life Insurance Company Defined Property, casualty, and other non-life insurers are the intended beneficiaries.
How to File a Carryback Claim
If you qualify, you claim a carryback refund on one of two forms. Individuals, estates, and trusts file Form 1045 (Application for Tentative Refund). Corporations file Form 1139.7Internal Revenue Service. Instructions for Form 10458Internal Revenue Service. Instructions for Form 1139
Deadlines
Both forms have to be filed within 12 months after the end of the tax year in which the loss arose.7Internal Revenue Service. Instructions for Form 1045 For a calendar-year taxpayer with a 2025 loss, that means December 31, 2026. Corporations also have to file their loss-year income tax return on or before the date they file Form 1139.8Internal Revenue Service. Instructions for Form 1139
Miss the 12-month window and you still have a backup. Individuals can file an amended return on Form 1040-X, which generally must be filed within three years after the due date (including extensions) of the return for the loss year.9Internal Revenue Service. Instructions for Form 1040-X The amended return route is slower than the tentative refund process, but it keeps a claim alive once the Form 1045 deadline has passed.
What to Attach
Incomplete applications get delayed or denied. For Form 1045, individuals must attach copies of Form 1040 (or the first three pages of Form 1040-SR), Schedules 1 through 3, and Schedules A, D, F, and J. You also need Form 461 (Limitation on Business Losses), Form 6251 (Alternative Minimum Tax) for each loss year, all K-1 schedules from partnerships or S corporations, and any forms from which the carryback originates, such as Schedule C or Form 3800.7Internal Revenue Service. Instructions for Form 1045 Copies of all forms and schedules for items that change in the carryback years are required as well, because recalculating prior-year income cascades into credits and deductions tied to adjusted gross income.
Corporations filing Form 1139 need the first two pages of the corporate income tax return, all forms and schedules generating the carryback (such as Schedule D or Form 3800), any Forms 8886 for reportable transactions, applicable election statements, and all carryback-year forms for items that were refigured.8Internal Revenue Service. Instructions for Form 1139
Processing and Interest
The IRS processes tentative refund applications within 90 days from the later of when the complete application is received, or the last day of the month that includes the due date (with extensions) for filing the loss-year return.7Internal Revenue Service. Instructions for Form 1045 The review is limited to math errors and basic eligibility, not a full audit. If problems turn up, the IRS sends a notice with corrections.
Interest works in your favor only if the IRS is slow. No interest is paid if the refund goes out within 45 days of the later of several dates, including when the loss-year return was filed and when the application was received in processable form. Past 45 days, interest accrues from the due date of the loss-year return.10Internal Revenue Service. Interest on Carryback of Net Operating Loss A fraudulent carryback claim carries a penalty equal to 75% of the resulting underpayment.11Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
State Rules Are Separate
Federal treatment doesn’t dictate state treatment. Each state with an income tax sets its own policy on carrybacks, and most have followed the federal government in eliminating them. The states that still allow one often cap the amount or limit it to one or two years. Carryforward periods vary too, with some states matching the federal indefinite rule and others imposing their own time limits. A business operating in more than one state has to track NOL carrybacks and carryforwards separately for each return.