Net Operating Loss Carryforward: 80% Cap, Section 382, and AMT

A net operating loss carryforward lets a business or individual apply a year’s tax loss against taxable income in later years, with no expiration date for losses generated in tax years beginning after December 31, 2017. The catch is the 80 percent cap: for those post-2017 losses, the deduction in any future year cannot exceed 80 percent of that year’s taxable income calculated before the NOL itself. Losses from earlier years still offset 100 percent of income, and several additional rules narrow how much of a loss actually reaches the carryforward stage in the first place.

What Counts as a Net Operating Loss

An NOL arises when allowable deductions for the year exceed gross income, with specific modifications spelled out in federal law.¹ C corporations, individuals with active business operations, and certain estates and trusts can generate one. Partnerships and S corporations cannot claim an NOL at the entity level. Their losses flow through to the individual owners, who then apply the NOL rules on their own returns.

For individuals, several items are stripped out of the calculation so the number reflects genuine business loss:

No deduction for personal exemptions counts.¹
Nonbusiness deductions can only offset nonbusiness income like investment earnings; they cannot create or enlarge an NOL.¹
Capital losses for non-corporate taxpayers can only offset capital gains in the NOL computation.¹
The Section 199A qualified business income deduction is not factored in.²

The standard deduction is a nonbusiness deduction, so it can only offset nonbusiness income. It cannot generate or increase an NOL on its own. Only expenses tied to a trade or business drive the calculation.

The 80 Percent Taxable Income Cap

For losses arising in tax years beginning after December 31, 2017, the NOL deduction in any year cannot exceed 80 percent of that year’s taxable income, computed before the NOL deduction itself.² The remaining 20 percent of income is always taxable no matter how large the carryforward is.

Take a corporation with $200,000 of taxable income and a $250,000 NOL carryforward from 2022. The maximum deduction is 80 percent of $200,000, which is $160,000. The company pays the 21 percent corporate rate on the remaining $40,000.³ The unused $90,000 carries forward, with no expiration.

Losses generated before 2018 are not subject to the 80 percent cap and can still offset 100 percent of taxable income.²

How Long the Carryforward Lasts

Losses arising in tax years beginning after December 31, 2017 carry forward indefinitely.⁴ Under the prior rules, taxpayers had 20 years to use a loss before it expired. That deadline is gone, which helps startups and businesses in industries with long recovery cycles.

The trade-off: most businesses can no longer carry losses back to prior years for an immediate refund. Before 2018, the general rule was a two-year carryback. That option no longer applies to most taxpayers.⁴

Farming Loss Exception

Farming losses are the main carryback still available. The farming portion of an NOL can be carried back two years and is measured as the smaller of your total NOL or the NOL you would have had using only farming income and deductions.¹ You can elect to waive the carryback, but the election must be made by the due date (including extensions) of the return for the loss year, and it is irrevocable. Certain insurance companies also retain limited carryback rights.⁴

CARES Act Losses Still Carrying Forward

The CARES Act temporarily reopened carrybacks for NOLs arising in 2018, 2019, and 2020, allowing those losses to be carried back up to five years. It also suspended the 80 percent cap for those loss years so they could offset 100 percent of prior-year income. Those provisions expired for losses arising after 2020. If any balance from a 2018-2020 loss remains unused, it now follows the standard 80 percent cap going forward.

Extra Hurdles Before a Loss Reaches the NOL

Owners of pass-through businesses face several limits their losses must clear before any of it becomes part of an NOL. The IRS requires these to be applied in a set order: basis, then at-risk, then passive activity.⁵

You cannot deduct losses beyond your tax basis in the entity. For S corporation shareholders, basis is stock basis plus any direct loans you made to the corporation. For partners, basis includes your share of partnership liabilities.
Losses that survive the basis check are then limited to the amount you have economically at risk. Nonrecourse financing that does not put you personally on the hook generally does not count.
If you do not materially participate in the business, losses are passive and can only offset passive income from other sources.

A loss blocked at any of these stages is suspended at that level until conditions change. Only what makes it through all three is potentially available for the NOL computation.

Excess Business Loss Limit

Non-corporate taxpayers face one more ceiling under Section 461(l). For the 2025 tax year, the threshold is $313,000 for single filers and $626,000 for joint filers, adjusted annually for inflation.⁶ Business losses above these amounts cannot reduce your current-year tax bill. Instead, the excess is reclassified as an NOL carryforward for the following year.

A joint filer with $900,000 of net business losses can only use $626,000 against current-year income. The remaining $274,000 becomes an NOL carryforward, subject to the 80 percent cap when applied in a future year. You report the excess as a positive adjustment on Schedule 1 of Form 1040 and track it going forward using Form 172.⁶ This rule applies through at least 2028 under current law.

Ordering Losses From Different Years

When a taxpayer holds NOL carryforwards from both before and after the 2018 cutoff, the IRS requires a specific sequence.⁷ Apply pre-2018 losses first; they offset 100 percent of taxable income (figured without regard to the NOL deduction, the Section 199A deduction, or the Section 250 deduction). If pre-2018 losses equal or exceed that figure, they make up the entire NOL deduction for the year, and no post-2017 losses are used. If taxable income exceeds the pre-2018 losses, then 80 percent of the remaining taxable income sets the ceiling on post-2017 loss use.

Say a corporation has $500,000 in pre-2018 NOLs and $300,000 in post-2017 NOLs against $600,000 of taxable income. The full $500,000 pre-2018 amount is used first, with no cap. That leaves $100,000 of taxable income, of which 80 percent, or $80,000, can be offset by post-2017 losses. The other $220,000 of post-2017 losses carries forward.

Section 382 Limits After an Ownership Change

Buying a company to absorb its NOL is exactly the transaction Section 382 was written to restrict. It imposes an annual cap on how much of a loss corporation’s pre-change NOL can be used after a significant ownership shift.

An ownership change occurs when one or more shareholders holding at least 5 percent of the stock increase their combined ownership by more than 50 percentage points over a rolling three-year testing period.⁸ A single large acquisition can trigger it, and so can a series of smaller sales or certain equity restructurings.

The annual limit equals the value of the old loss corporation multiplied by the long-term tax-exempt rate published monthly by the IRS.⁸ As of early 2026, that rate is 3.58 percent.⁹ For a loss corporation valued at $10 million, the annual cap on using pre-change NOLs would be roughly $358,000. Amounts above the cap in a given year are not lost; they carry forward. But a buyer paying a premium for a $5 million NOL may only be able to use a fraction each year, spreading the tax benefit over a decade or more. The limit also applies after certain tax-free reorganizations, not just outright stock purchases.

The AMT Version for Individuals

Taxpayers subject to the alternative minimum tax compute a separate figure called the alternative tax net operating loss deduction. The framework is the same, but AMT adjustments and preference items are factored in, which can raise or lower the loss amount compared to the regular NOL.¹⁰

The cap is different too: the AMT version is generally limited to 90 percent of alternative minimum taxable income rather than 80 percent of regular taxable income.¹⁰ Individual AMT exposure has narrowed since the Tax Cuts and Jobs Act raised exemption amounts, but high-income taxpayers with large incentive stock option exercises or substantial state tax deductions can still be caught.

How to Report the Carryforward

Corporations report the NOL deduction on line 29a of Form 1120 and must attach a statement showing how the deduction was computed, including the loss year and the amount applied.¹¹ The deduction cannot exceed taxable income after special deductions for pre-2018 losses, and cannot exceed 80 percent of the relevant taxable income figure for post-2017 losses.

Individuals report the deduction as a negative number on line 8a of Schedule 1 (Form 1040).¹² Individuals, estates, and trusts use Form 172 to calculate the NOL amount and track how much has been used in prior years and how much remains.² Form 172 replaced the older worksheet approach in IRS Publication 536.

Records You Need to Keep

An NOL carryforward creates record-keeping obligations that outlast the normal three-year audit window. You need to keep records supporting a loss year until the NOL is fully used and the statute of limitations closes on the return where the last piece was claimed. With indefinite carryforwards, that can mean holding records for a decade or more.

The IRS can examine returns from years that are otherwise closed when the purpose is to verify an NOL claimed on a currently open return.⁷ The IRS cannot assess additional tax for those closed years, but it can adjust the figures to determine the correct NOL available in the open year. If the original records are gone, the burden is on you to prove the loss existed and had not already been absorbed.

A cumulative tracking schedule helps: for each year, the starting carryforward balance, the amount used, and the ending balance. Keep it alongside copies of the returns and the underlying documentation, including payroll records, lease agreements, depreciation schedules, and the invoices and receipts supporting the deductions that created the loss.

State Rules Are Their Own Question

Federal NOL rules do not automatically apply to state tax returns. States vary in whether they follow the 80 percent cap, the indefinite carryforward period, or both. Some allow a full 100 percent offset but impose a fixed carryforward window. Others mirror federal law. A few have temporarily suspended NOL deductions for higher-income taxpayers during budget shortfalls. If your business operates in more than one state, the NOL position on each state return may look very different from the federal return and from each other, so checking each state’s current conformity rules matters when a large loss is at stake.

1
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
2
Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts
3
Internal Revenue Service. Publication 542, Corporations
4
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
5
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
6
Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses
7
Internal Revenue Service. IRM 4.11.11 – Net Operating Loss Cases
8
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
9
Internal Revenue Service. Revenue Ruling 2026-7
10
Internal Revenue Service. Instructions for Form 6251
11
Internal Revenue Service. Instructions for Form 1120
12
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income