A net operating loss carryforward generated in a tax year that began after December 31, 2017 does not expire — it carries forward indefinitely, though it can only offset up to 80% of your taxable income in any single year. NOLs from tax years that began before January 1, 2018 are different: they expire 20 years after the year they arose, and anything unused at that point is gone permanently.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Which set of rules governs your carryforward depends entirely on the tax year the loss originated in, and if you hold losses from both eras, the order in which you apply them is fixed by statute.
Pre-2018 NOLs Expire After 20 Years
If your NOL arose in a tax year beginning before January 1, 2018, you have 20 taxable years to use it. Whatever remains after that window closes is forfeited. A loss from 2005 expired at the end of the 2025 tax year. A loss from 2010 expires at the end of 2030. There is no extension and no relief provision for a balance that runs out the clock.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
The tradeoff for that deadline is generosity in usage. Pre-2018 losses carry no percentage cap. If you have $500,000 of taxable income and $500,000 of pre-2018 NOLs, you can wipe out that income entirely.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Under the old rules, these losses could also be carried back two years to reclaim taxes on previously profitable years, though that general carryback option has since been repealed for most taxpayers.
Section 172(b)(2) requires you to apply the entire loss to the earliest available taxable year first, then carry any remainder to the next year, and so on.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Practitioners call this FIFO — first in, first out. The effect is that the oldest loss always burns off before any newer one, which is how the statute protects a loss nearing its 20-year deadline from being skipped over.
Post-2017 NOLs Never Expire, but the 80% Cap Applies
The Tax Cuts and Jobs Act rewrote the rules for losses arising in tax years beginning after December 31, 2017. The 20-year clock was eliminated. These losses carry forward indefinitely and will never expire solely because time has passed.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
The restriction is that a post-2017 NOL can only offset 80% of your taxable income in any given year, computed before the NOL deduction itself. A corporation with $1 million of pre-deduction taxable income can use at most $800,000 of post-2017 NOLs, leaving $200,000 subject to tax. Whatever is not used carries forward. The practical consequence is that even very large post-2017 losses take years to fully absorb, and you will always owe tax on some portion of income in any profitable year where only post-2017 losses are available.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
The TCJA also eliminated the general two-year carryback. Post-2017 losses go forward only, with narrow exceptions for farming businesses and non-life insurance companies. The CARES Act temporarily overrode this, allowing losses from 2018, 2019, and 2020 to be carried back five years, but that relief window has closed.2Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions Any NOL generated in 2021 or later is carryforward-only.
The changes to the corporate NOL rules are permanent and have no scheduled sunset.
How to Apply Losses From Both Eras in the Same Year
If you hold both pre-2018 and post-2017 NOLs at once, the ordering is not optional. All pre-2018 losses are applied first, oldest first. Only after those are fully exhausted do the post-2017 losses come into play, and only then does the 80% cap kick in.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
This sequencing works in your favor. It puts the losses that can expire at the front of the line, and it lets pre-2018 losses offset 100% of income while they last. Once the pre-2018 balance is used up and you shift to post-2017 losses, the 80% ceiling begins to apply and you will owe tax on at least 20% of income regardless of your remaining NOL balance.
Here is how the math runs. Suppose you have $200,000 of pre-2018 NOLs and $500,000 of post-2017 NOLs, and your 2026 taxable income before any NOL deduction is $300,000. The first $200,000 is offset by the pre-2018 losses at 100%, leaving $100,000. The 80% cap then applies to that remainder: $80,000 of post-2017 losses is deductible, leaving $20,000 of taxable income. The remaining $420,000 of post-2017 losses carries forward indefinitely.
Getting an expiring pre-2018 loss wasted because a post-2017 loss was applied out of order is a well-documented audit trigger. Your records need to show which vintage each loss belongs to, how much was applied against each year’s income, and the balance remaining by vintage after each return.
Section 382 Can Cap Your Annual Usage After an Ownership Change
An indefinite carryforward can still be effectively frozen if the corporation holding it goes through a significant ownership change. Section 382 imposes an annual dollar limit on how much pre-change NOL the company can use, and this limit often stretches what would have been a fast deduction over many years.3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
An ownership change is triggered when one or more 5-percent shareholders increase their combined ownership by more than 50 percentage points over a three-year testing period.4eCFR. 26 CFR 1.382-2T – Definition of Ownership Change Under Section 382 Stock sales, mergers, new equity issuances, and restructurings can all cause it. The rule exists to keep profitable companies from acquiring loss-heavy targets just for the NOLs.
Once an ownership change occurs, the annual cap on using pre-change losses equals the fair market value of the loss corporation’s stock immediately before the change, multiplied by the IRS-published long-term tax-exempt rate.3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change That rate has recently been around 3.5%. A company valued at $10 million before the change would face an annual usage cap of roughly $350,000, no matter how much taxable income it earns.
If the company doesn’t use the full annual cap in a given year, the unused portion rolls into the next year’s limit. But there is a further catch: if the new owners fail to continue the old company’s business enterprise for at least two years after the change, the annual limit drops to zero and the pre-change losses are wiped out.3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
The Section 382 cap applies to both pre-2018 and post-2017 NOLs that existed before the ownership change, and it operates on top of the 80% income limitation rather than instead of it. A post-change corporation can face both restrictions at the same time.
Farming and Non-Life Insurance Businesses Follow Different Rules
Two industries keep rules that depart from the standard framework. Farming businesses can still carry losses back two years, even though the general carryback was repealed. The farming loss eligible for carryback is the smaller of the net loss attributable to farming activities or the total NOL for the year.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
Non-life insurance companies (property and casualty insurers, for example) are exempt from the 80% taxable income cap. Their NOLs can offset 100% of taxable income, the way all NOLs worked before the TCJA, and they retain a two-year carryback.5Federal Register. Consolidated Net Operating Losses If you operate in either industry, the standard summary of indefinite carryforward, 80% cap, and no carryback does not fully describe your situation.
State NOLs May Still Expire Even When Federal Ones Don’t
Most states with an income tax have their own NOL provisions, and they often diverge from the federal rules. Some states conform to the indefinite carryforward; others impose their own expiration periods, commonly 15 or 20 years. Several cap the annual deduction at a dollar amount rather than a percentage of income, or in addition to one. A handful of states have temporarily suspended NOL deductions during budget shortfalls and then reinstated them later.
Many states either do not allow carrybacks at all or limit them to shorter periods than the federal government historically permitted. If you operate in more than one state, each state’s rules govern the NOLs attributable to income earned there. A loss that lives forever on your federal return may still expire on your state return.
Tracking the Balance Is Your Job, Not the IRS’s
The IRS does not keep a running balance of your NOL carryforwards. That is on you. For each loss vintage, your records should show the original loss amount, the year it arose, the amount applied in each subsequent tax year, and the remaining balance. If you hold losses from both sides of the 2018 dividing line, document which set of rules governs each one and show that the ordering was followed.
Publication 536, the IRS guide for individuals computing NOLs, is no longer being updated; the last revision covers 2023.6Internal Revenue Service. About Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts The underlying rules remain current in the statute, but don’t rely on that publication for anything that has happened since its final revision.
Individuals report the NOL deduction on Schedule 1 of Form 1040; corporations report it on Form 1120. In both cases, the 80% limitation is computed on an internal worksheet rather than on the return itself. A Section 382 limitation requires its own separate tracking schedule on top of that. Given the number of overlapping rules and the permanence of a missed deadline on the pre-2018 side, this is one area where professional help tends to earn back its cost in mistakes avoided.