Internal Revenue Code Section 172 governs how businesses and certain individuals turn a net operating loss into a deduction against income in other years. For losses arising in tax years beginning after December 31, 2017, the rule is straightforward in outline: the loss carries forward indefinitely, there is no general carryback, and the deduction in any single year cannot exceed 80% of that year’s taxable income. Farming operations and non-life insurance companies get narrower, more favorable treatment. Everything else about NOL planning under current law flows from those baselines.
Calculating the NOL
A net operating loss is not just the negative number at the bottom of a return. Section 172 requires adjustments before a reported loss becomes an NOL you can carry to another year.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Two adjustments matter most. Any deduction for NOLs carried from other years is stripped out, which prevents a prior-year loss from inflating the current-year loss. The qualified business income deduction under Section 199A (set at 23% for tax years beginning after 2025) is also excluded, so the QBI deduction cannot create or enlarge an NOL.2Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts
Business vs. Non-Business for Individuals
For corporations the calculation is direct, because nearly all corporate deductions are business deductions. Non-corporate taxpayers have to separate business from non-business items, and this trips people up.3eCFR. 26 CFR 1.172-3 – Net Operating Loss in Case of a Taxpayer Other Than a Corporation
Non-business deductions cover items like the standard deduction and personal itemized deductions for medical expenses. Non-business income includes things like dividends, investment interest, and annuity income earned outside a business. Non-business deductions can only offset non-business income; any excess gets removed from the NOL.
An example. A non-corporate taxpayer has a preliminary loss of $100,000 that includes $20,000 in non-business deductions and $5,000 in non-business income. Non-business deductions exceed non-business income by $15,000. That $15,000 is added back, leaving an NOL of $85,000 available to carry forward.
Individuals, estates, and trusts report the final figure on Form 1045; corporations use Form 1139.4Internal Revenue Service. About Form 1045, Application for Tentative Refund5Internal Revenue Service. About Form 1139, Corporation Application for Tentative Refund
Carryforward and the 80% Cap
For NOLs arising in tax years beginning after December 31, 2017, the default is indefinite carryforward with no carryback. The loss carries forward until it is fully absorbed against future income or the taxpayer ceases to exist.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
The order is not flexible. NOLs are applied to the earliest available tax year first and worked forward year by year. When you hold NOLs from multiple loss years, the oldest is absorbed first regardless of which one would produce a bigger benefit.
The 80% limitation caps how much of a post-2017 NOL you can deduct in a given year. For NOLs arising after 2017 and used in tax years beginning after December 31, 2020, the deduction cannot exceed 80% of taxable income, calculated before the NOL deduction, the QBI deduction, and the Section 250 deduction for foreign-derived income.6Internal Revenue Service. Update to 2021 Pub 536 for Certain Post-2020 NOL Deductions
A corporation with $500,000 of taxable income before any NOL deduction and $1 million in carryforward losses can deduct at most $400,000 (80% of $500,000). The remaining $100,000 of income is taxed normally that year, and the unused portion of the NOL carries into the next year, where the 80% cap applies again. Post-2017 NOLs cannot reduce tax liability to zero on their own; you will owe tax on at least 20% of taxable income in any year you use them.
Pre-2018 NOLs Follow the Old Rules
NOLs that arose before 2018 play by the pre-TCJA rules. They can offset 100% of taxable income with no 80% cap, but they expire after 20 years.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
When a taxpayer holds both pre-2018 and post-2017 NOLs, sequencing matters. Pre-2018 losses are applied first and absorb income dollar-for-dollar. The 80% cap then applies to whatever taxable income remains before post-2017 losses are taken. Getting the ordering wrong can cost real money, especially if pre-2018 losses are approaching the 20-year expiration.
The Narrow Carryback Exceptions
Farming Losses
Farming operations are the main surviving exception to the no-carryback rule. A farming loss can be carried back two years even for losses arising after 2017. The farming loss is the smaller of the taxpayer’s total NOL for the year or the NOL that would result if only farming income and deductions were considered.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Farmers can elect to waive the two-year carryback and carry the farming loss forward indefinitely. The waiver must be made by the filing deadline (including extensions) for the loss-year return, and once made it is irrevocable for that year’s loss. Miss the deadline without affirmatively waiving, and you are treated as having elected the carryback.
Non-Life Insurance Companies
Property and casualty insurance companies keep two advantages no other taxpayer currently has. They retain a two-year carryback and a 20-year carryforward, mirroring the pre-TCJA rules, and they are exempt from the 80% cap entirely, so their NOL can offset 100% of taxable income.7Internal Revenue Service. Instructions for Form 1139 Life insurance companies get neither break: they follow the standard post-2017 rules with the 80% cap.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
REIT Wall
An NOL from a REIT year cannot be carried back to any earlier year, and an NOL from a non-REIT year cannot be carried back to a year in which the entity qualified as a REIT.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
The Excess Business Loss Cap Runs First for Individuals
Before a non-corporate taxpayer reaches the Section 172 calculation, Section 461(l) puts a ceiling on how much net business loss can offset non-business income in the current year. For 2026, the cap is $256,000 for single filers and $512,000 for married couples filing jointly, adjusted annually for inflation.8Legal Information Institute. 26 USC 461(l)(3) – Excess Business Loss
Any business loss above the cap is an excess business loss, not deductible in the current year. It is automatically converted into an NOL carryforward for the following year. A single filer with a $400,000 net business loss in 2026 can deduct $256,000 against other income currently; the remaining $144,000 becomes a 2027 NOL subject to the 80% cap. The Section 461(l) cap was extended through 2028 by the Inflation Reduction Act of 2022 and subsequently made permanent.
Section 382 Limits NOLs After an Ownership Change
Section 172 tells you how NOLs are calculated and carried. Section 382 limits how much of those carryforwards a corporation can actually use after a significant change in ownership, so any business involved in a merger, acquisition, or major stock transaction has to model it separately.
An ownership change occurs when one or more 5-percent shareholders increase their collective ownership by more than 50 percentage points during a rolling testing period (generally three years).9eCFR. 26 CFR 1.382-2T – Definition of Ownership Change Under Section 382 Once that happens, the annual use of pre-change NOLs is capped at the value of the old loss corporation immediately before the change, multiplied by the IRS long-term tax-exempt rate.10Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses
A corporation worth $10 million that undergoes an ownership change when the long-term tax-exempt rate is 3.58% would face an annual Section 382 limit of $358,000. Even with $5 million in NOL carryforwards on the books, only $358,000 could be used per year against post-change income. The rate fluctuates monthly; the IRS published a rate of 3.58% for recent ownership changes.11Internal Revenue Service. Rev. Rul. 2026-7
Three Vintages of NOLs You May Still Hold
Taxpayers who have carried losses for several years may hold up to three categories, each with different rules:
- Pre-2018 NOLs: no 80% cap, offset income dollar-for-dollar, but expire after 20 years.
- 2018-2020 NOLs: had an optional five-year carryback under the CARES Act. Anything not used under that carryback now sits as an indefinite carryforward subject to the 80% cap.12Congressional Research Service. Tax Treatment of Net Operating Losses in the CARES Act
- Post-2020 NOLs: subject to the 80% cap, indefinite carryforward, no carryback except farming losses. This is the permanent regime.
Track each vintage separately. Pre-2018 losses have to be applied before post-2017 losses, and because the two categories follow different limitation rules, mixing them can produce overstated deductions and penalties.
Refund Claim Deadlines When a Carryback Applies
When a carryback is available (farming losses, non-life insurance losses), taxpayers who want a quick refund file Form 1045 for individuals, estates, and trusts, or Form 1139 for corporations. Form 1045 must be filed within one year after the end of the loss year, and only after the loss-year return has been filed.13Internal Revenue Service. Instructions for Form 1045
Missing the one-year deadline does not forfeit the carryback, but it forces the taxpayer onto Form 1040-X or Form 1120-X, which takes considerably longer to process. The tentative refund route through Form 1045 or 1139 is designed to produce a refund within 90 days.
State Tax Rules Do Not Automatically Follow Section 172
Federal NOL rules do not automatically flow through to state income tax returns. Roughly 19 states and the District of Columbia fully conform to federal NOL provisions. Others cap the carryforward period at 15 or 20 years, still permit carrybacks of varying lengths, cap the dollar amount that can be carried forward, or have temporarily suspended NOL usage to manage budget shortfalls. A business operating in multiple states needs each state’s NOL rules tracked independently alongside the federal carryforward schedule.