NOL limitations under the 2017 tax reform work like this: for losses arising in tax years beginning after December 31, 2017, you can deduct a net operating loss only against up to 80 percent of your taxable income in the year you use it, you generally can’t carry it back to prior years, and whatever you don’t use carries forward indefinitely.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction Older losses, individual business losses, and losses inside a company that changes hands all follow different rules on top of that baseline.
The 80 Percent Cap
If your company earns $1 million of taxable income and carries forward a $2 million post-2017 loss, the deduction is capped at $800,000. You owe tax on the remaining $200,000, and the unused $1.2 million stays on the books for future years.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
The taxable income figure used to compute the 80 percent is calculated before the NOL deduction itself and before deductions under Section 199A (qualified business income) and Section 250 (foreign-derived intangible income). That avoids circular math and applies the cap to a clean income number.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Losses Now Carry Forward Indefinitely
The tradeoff for the 80 percent cap is that post-2017 losses never expire. Under the old rules, a carried-forward loss vanished after 20 years if you couldn’t use it. That clock is gone. A loss generated in 2019 can wait 30 or 40 years for the business to produce enough income to absorb it.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
The record-keeping burden that comes with indefinite carryforwards is real. You need to track the year each loss arose, how much you used in each intervening year, and how much remains — because losing the ledger means losing deductions or overclaiming and triggering an adjustment.
No Carryback, With Two Narrow Exceptions
The reform also eliminated the general two-year carryback that used to let businesses apply a loss to prior returns and collect a refund. For most taxpayers, a post-2017 loss can only reduce future tax bills, not pull cash back from years already filed. Two categories still qualify for a two-year carryback: farming operations and insurance companies other than life insurers.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Pre-2018 Losses Escape the 80 Percent Cap
This is where taxpayers with older losses on the books often leave money behind. Losses that arose before January 1, 2018 can offset 100 percent of taxable income. The 80 percent cap does not touch them. They do still carry the old 20-year expiration, so using them before they lapse matters.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Ordering matters when both vintages are in play. Pre-2018 losses are applied first, and the 80 percent limit applies only to the taxable income that remains. Say you have $500,000 in pre-2018 losses and $2 million in post-2020 losses, with $1 million of taxable income before any NOL deduction. The older losses wipe out the first $500,000 at full value. The 80 percent cap then applies to the remaining $500,000, letting you deduct another $400,000 of the newer losses. You owe tax on $100,000.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
The CARES Act Window for 2018 Through 2020 Losses
Congress temporarily unwound both TCJA restrictions during the pandemic. Losses arising in tax years beginning after December 31, 2017 and before January 1, 2021 — calendar years 2018, 2019, and 2020 for most taxpayers — could be carried back five years.2Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions The 80 percent cap was also suspended for those three years, so losses used during 2018 through 2020 could offset 100 percent of taxable income whether carried back or forward.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
All of that relief expired after 2020. Losses arising in 2021 and later fall back under the permanent rules: 80 percent cap, no carryback except for farming and non-life insurance, and indefinite carryforward.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Individual Taxpayers Face an Extra Limit First
Before an individual’s business losses ever reach the NOL calculation, Section 461(l) sets a separate ceiling. Individual taxpayers, including partners and S corporation shareholders, cannot deduct aggregate business losses exceeding a set threshold in a single year. For 2026, that threshold is $512,000 for joint filers and $256,000 for single filers, adjusted annually for inflation.
Losses above the ceiling aren’t lost. The disallowed amount becomes an NOL carryforward, which then falls under the 80 percent cap and indefinite carryforward rules that govern every post-2017 loss. That produces a two-layer limitation: Section 461(l) caps the current-year deduction against other income, and the 80 percent rule caps how quickly the resulting carryforward can be used later.
The practical effect for an individual with $1 million in business losses in 2026, filing jointly, is that $512,000 can offset other income that year. The remaining $488,000 turns into a carryforward capped at 80 percent of taxable income in each future year it’s used. For owners with volatile income, this stretches tax relief over a longer timeline than most expect going in.
Section 382 Adds a Tighter Ceiling After an Ownership Change
When a corporation goes through a significant ownership change, Section 382 imposes a separate annual limit on the use of pre-change losses that can bite harder than the 80 percent cap. An ownership change is defined as one or more shareholders increasing their combined stake by more than 50 percentage points over a rolling three-year period. Mergers, acquisitions, and large equity issuances all trigger the analysis.3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards
After the change, the annual cap on pre-change NOL usage equals the value of the corporation’s stock immediately before the ownership change multiplied by the long-term tax-exempt rate published by the IRS. That rate is the highest adjusted federal long-term rate from the three-month window ending in the month of the change.3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards If the company is worth $100 million and the rate is 2 percent, only $2 million of pre-change losses can be used per year, no matter how much income the company generates.
The provision exists to keep corporations from being acquired mainly for their tax losses. It applies alongside the 80 percent cap, and whichever restriction bites harder controls. Unused Section 382 capacity carries forward and stacks onto the next year’s limit, so the ceiling can grow over time. When a company with a large NOL balance is acquired at a modest valuation and the long-term rate is low, the losses often take decades to absorb, and can effectively expire unused if the business doesn’t last long enough to work through them.
State Rules May Not Follow the Federal Approach
Federal rules are only part of the picture if your business owes state income tax. A minority of states have decoupled from the federal 80 percent cap, so a state NOL deduction can end up more or less generous than the federal one depending on the jurisdiction. State carryforward periods range from 20 years to indefinite, and many states do not allow any carryback.
Businesses operating across multiple states track separate NOL balances for each jurisdiction. With the federal carryforward now running indefinitely, a loss fully absorbed on the federal return may still be available at the state level, or the opposite. Checking each state’s conformity status each filing season is what keeps deductions from slipping and liabilities from being misstated.