Net Operating Losses: Indefinite Carryforward and the 80% Cap

A net operating loss carryforward from a tax year beginning after December 31, 2017, has no expiration date under federal law, but it can only offset up to 80 percent of your taxable income in any single year.¹ That combination, put in place by the Tax Cuts and Jobs Act, replaced the old rule that let you wipe out 100 percent of a year’s income but killed any unused loss after 20 years. You gain unlimited time and lose speed.

When You Have a Net Operating Loss

You have an NOL when your allowable business deductions for the year exceed your gross income. That negative figure becomes a tax asset: something you can carry into future years to reduce tax when the business is profitable again.

The number is not simply total deductions minus total income. Several modifications apply, especially for individuals, estates, and trusts. You cannot count the qualified business income deduction or capital losses that exceed capital gains, among other items.² Publication 536 lists the full set of adjustments, and you report the result on Form 172.³ Corporations run through a comparable set of modifications and book the result as a deferred tax asset.

How the 80 Percent Cap Works

For tax years beginning after December 31, 2020, the deduction for post-2017 NOLs cannot exceed 80 percent of your taxable income, calculated before applying the NOL deduction itself and without regard to the qualified business income deduction or Section 250 deductions.¹ At least 20 percent of your taxable income stays on the table each profitable year, no matter how large your accumulated losses.

A short example. Your taxable income before the NOL deduction is $100,000, and you carry $150,000 in post-2017 NOLs. You can deduct 80 percent of $100,000, or $80,000. You pay tax on the remaining $20,000, and the unused $70,000 rolls into the next year. Under pre-TCJA rules, that same $150,000 would have zeroed out the full $100,000. The 80 percent ceiling is what stretches recovery of a large loss over more years.

For a business sitting on $10 million in carryforwards and generating $2 million in annual taxable income, the math means owing tax on $400,000 every year while working through the loss over more than six years. Cash flow and tax provision projections need to reflect that pace.

Losses From Before 2018 Follow the Old Rules

NOLs generated before January 1, 2018, are grandfathered. They can offset 100 percent of taxable income, but they still expire 20 years after the loss year. A loss from 2015 is gone after the 2035 tax year if you have not used it.¹

When you hold both vintages, ordering is fixed by statute. Pre-2018 losses come off first, dollar-for-dollar, with no percentage cap. Post-2017 losses apply next, and the 80 percent cap is measured against whatever taxable income remains.²

Suppose taxable income is $200,000, you have $50,000 in pre-2018 NOLs, and $300,000 in post-2017 NOLs. The pre-2018 loss cuts income to $150,000. The 80 percent cap then allows up to $120,000 of post-2017 losses (80 percent of $150,000). Total NOL deduction: $170,000. Taxable income left: $30,000. Post-2017 carryforward remaining: $180,000.

If you have multiple loss years within either category, you use them oldest first. That ordering matters most for pre-2018 losses, which are the ones with an expiration date.

The Excess Business Loss Limit Comes First

For non-corporate taxpayers, a business loss has to clear one more gate before it becomes an NOL at all. Section 461(l) caps how much net business loss you can deduct in a single year. For 2025 the cap is $313,000 for single filers and $626,000 for joint filers, indexed for inflation each year.⁴

Anything above the threshold is disallowed for the current year but is not lost. The excess is treated as an NOL carryforward to the next tax year, where it enters the pool and follows the indefinite-carryforward and 80 percent rules.⁴ A sole proprietor or partner with a $1 million loss in one year cannot deduct all of it that year, even if the loss is real.

This limitation started as a temporary TCJA provision, was extended by the Inflation Reduction Act through 2028, and has since been made permanent by the One Big Beautiful Bill Act.⁴

Ownership Changes Can Slow the Loss Down

If the loss company changes hands, Section 382 caps how much of the pre-change NOL can be used each year afterward. An ownership change is triggered when one or more major shareholders increase their combined ownership by more than 50 percentage points during a roughly three-year testing period.⁵

After that, the annual usage limit equals the fair market value of the loss corporation’s equity immediately before the change, multiplied by the IRS long-term tax-exempt rate.⁶ That rate, published monthly, is 3.58 percent as of early 2026.⁷ For an acquired company worth $50 million, that works out to roughly $1.79 million of pre-change NOL usable per year. A $30 million loss pool would take about 17 years to absorb, assuming enough taxable income. Unused annual capacity carries forward, but the pace is far slower than without the cap. This is often the deciding factor in whether an acquired company’s NOLs have real value.

Farming and Non-Life Insurance Are Treated Differently

Two groups kept rights the TCJA took away from everyone else. Farming businesses can still carry the farming portion of an NOL back two years, applying it to the earliest year first before moving to the next.³¹ Only the part of the NOL tied to farming income and deductions qualifies, and farming here means cultivating land or raising and harvesting agricultural or horticultural products, not simply buying and reselling what someone else grew.

Non-life insurance companies operate on a separate track entirely. They keep the two-year carryback and a 20-year carryforward, and the 80 percent cap does not apply to them.¹

State Rules Often Do Not Match

Everything above governs your federal return. Many states do not fully conform to federal NOL rules. Some limit carryforward periods to as few as five years, some cap the dollar amount deductible, some impose their own percentage limits, and a handful have suspended NOL deductions temporarily during budget shortfalls. A loss that never expires federally may expire in a decade on your state return, so a state-by-state check belongs in any planning that assumes losses will be recovered in full.

NOLs Do Not Reduce Self-Employment Tax

One trap catches sole proprietors and partners. An NOL carryforward reduces federal income tax, but it does not reduce self-employment tax. Social Security and Medicare contributions are calculated on your current-year net earnings from the business, not on taxable income after the NOL deduction. A profitable year produces a full self-employment tax bill even when a large carryforward zeros out most of your income tax.

1
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
2
Internal Revenue Service. Publication 536 – Net Operating Losses for Individuals, Estates, and Trusts
3
Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts
4
Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses
5
Internal Revenue Service. Notice 2003-65 – Built-In Gains and Losses Under Section 382(h)
6
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
7
Internal Revenue Service. Revenue Ruling 2026-6