Unabsorbed Depreciation in Income Tax: NOL, Section 179, At-Risk

When depreciation exceeds your income for the year, the unused portion doesn’t disappear. Federal tax law routes unabsorbed depreciation into a carry forward through one of several systems: a Section 179 carryover, a net operating loss, a suspended passive loss, or an at-risk suspension. Which system applies depends on the kind of depreciation you claimed, whether you materially participate in the activity, and how much you have at risk. Each has its own rules for when you eventually get the deduction and its own form for tracking it.

Section 179 Excess Carries Over Indefinitely

Section 179 lets you expense the full cost of qualifying equipment in the year you place it in service instead of depreciating it over the recovery period. For 2026, the maximum deduction is $2,560,000, and it begins phasing out dollar-for-dollar once you place more than $4,090,000 of qualifying property in service.¹

The catch: your Section 179 deduction cannot exceed taxable income from the active conduct of any trade or business during the year. It cannot create or increase a net loss. If you buy $400,000 of equipment but your business only produces $250,000 of taxable income, you expense $250,000 this year. The other $150,000 carries forward indefinitely, available whenever your business income can absorb it.¹

The business income limitation is calculated before the Section 179 deduction itself, so you’re measuring the deduction against pre-179 income. You report the disallowed amount from the prior year on Form 4562, line 13, and it feeds into the current year’s calculation.²

Bonus Depreciation and Regular MACRS Flow into an NOL

Bonus depreciation works differently. It is not limited by your business income and can create or increase a net operating loss. The One Big Beautiful Bill restored 100% first-year bonus depreciation for qualifying property acquired after January 19, 2025.³ Regular MACRS depreciation behaves the same way: it’s mandatory once the asset is placed in service, has no income floor, and can push your return into a loss.⁴

When either form of depreciation drives your deductions past your income, the excess doesn’t sit in a depreciation-specific bucket. It becomes part of your net operating loss, which is where the carryforward mechanics take over.

How the NOL Carry Forward Works

Net operating losses arising in tax years after 2017 carry forward indefinitely. There is no expiration date. The trade-off is an annual usage cap: a post-2017 NOL can offset only 80% of your taxable income in any given carryforward year, calculated before the NOL deduction itself, the qualified business income deduction, and Section 250 deductions.⁵

If your taxable income next year is $500,000, you can use up to $400,000 of carried-forward NOL. The unused balance rolls to the following year, where the 80% cap applies again. In practical terms, a profitable year always produces at least some federal tax liability, even when you have large carryforwards in reserve. Pre-2018 losses that haven’t been used still offset income dollar-for-dollar without the 80% cap, but few remain on the books at this point.⁶

The Excess Business Loss Gate for Individuals

Before your loss reaches the NOL system, individual taxpayers, estates, and trusts run into another cap. Section 461(l) limits aggregate business losses that can be deducted against nonbusiness income in a single year. For 2026, the threshold is $256,000 for single filers and $512,000 for married couples filing jointly. Any business loss above that cap, including losses driven by depreciation, is reclassified as an NOL carryforward to the next tax year.⁷

Suppose you’re a single filer with $100,000 in wages and a $500,000 business loss driven partly by bonus depreciation. You can deduct $256,000 against your other income this year. The remaining $244,000 converts to an NOL carryforward and becomes subject to the 80% limitation when you use it in later years. The tax benefit is delayed, not lost.

Passive Activity Depreciation Gets Suspended

Depreciation from rental properties and from businesses where you don’t materially participate faces a separate limitation. Under Section 469, losses from passive activities, including depreciation, can generally only offset income from other passive activities.⁸ If a rental produces $40,000 of depreciation but only $25,000 of rental income, the $15,000 excess cannot offset your salary, freelance income, or investment gains under normal circumstances. It becomes a suspended passive loss, carried forward until you have passive income to absorb it or you dispose of the property.

Rental real estate has a narrow exception. If you actively participate in managing a rental and your modified adjusted gross income is $100,000 or less, you can deduct up to $25,000 of passive rental losses against nonpassive income. The allowance phases out by $1 for every $2 of income above $100,000 and disappears entirely at $150,000.⁸

When you fully dispose of a passive activity in a taxable transaction, all accumulated suspended losses from that activity become deductible against any type of income. That is where years of stacked depreciation deductions on a rental typically pay off. You track passive activity losses and suspended amounts on Form 8582.⁹

At-Risk Suspension for Financed Assets

Section 465 caps your deductible loss from any activity at the total amount you have at risk. Your at-risk amount generally includes cash and property you contributed plus amounts you borrowed when you’re personally liable for repayment.¹⁰

This matters when large asset purchases are financed with nonrecourse debt. If you buy $1 million of equipment with $200,000 down and an $800,000 nonrecourse loan on which you have no personal liability, your at-risk amount may be only $200,000. Depreciation deductions beyond that are suspended and carry forward to years when your at-risk amount increases.

How the Limitations Stack

Ordering matters, because each limitation filters what passes to the next. When depreciation exceeds income, the excess runs through these gates in sequence:

At-risk limitation (Section 465): losses that exceed your amount at risk are suspended first.
Passive activity limitation (Section 469): losses that survive the at-risk filter but come from passive activities are suspended next, unless the rental real estate exception applies.
Excess business loss limitation (Section 461(l)): active business losses that survive both prior filters are capped at $256,000 (single) or $512,000 (joint) for 2026, with the excess converting to an NOL carryforward.
NOL carryforward (Section 172): losses that create or add to a net operating loss carry forward indefinitely, limited to 80% of taxable income in any future year.

A single depreciation deduction can hit multiple gates. Depreciation on a rental financed with nonrecourse debt might be limited first by the at-risk rules, then by the passive activity rules, then sit as a suspended loss until you generate passive income or sell the property.

Tracking Unabsorbed Depreciation Year to Year

Each carryforward has its own form. Losing track of these amounts means silently forfeiting deductions you already earned.

Section 179 carryovers: Form 4562, with the prior-year disallowed amount on line 13.²
Net operating losses: Form 172. You recompute the available NOL each year, accounting for how much was used and the 80% limitation.⁶
Suspended passive losses: Form 8582, which calculates how much of the current year’s passive loss is allowed and carries the rest forward.⁹
Excess business losses: Form 461, which determines the amount reclassified as an NOL carryforward. The IRS recommends keeping a record of each year’s excess business loss because it carries into subsequent years as an NOL.⁷
At-risk limitations: Form 6198, which tracks your at-risk amount and the disallowed portion of any loss.¹⁰

If you file a separate Form 4562 for each business or activity, keep each activity’s depreciation history clean and distinct.² Commingling carryforward amounts across activities creates problems during audits and makes it harder to determine what remains when you eventually sell or close a business. A spreadsheet or tax software that rolls the numbers forward year over year is the minimum, because the worst outcome isn’t a penalty. It’s forgetting a deduction you already earned.

1
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
2
Internal Revenue Service. Instructions for Form 4562
3
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
4
Internal Revenue Service. Publication 946, How To Depreciate Property
5
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
6
Internal Revenue Service. Instructions for Form 172
7
Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses
8
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
9
Internal Revenue Service. About Form 8582, Passive Activity Loss Limitations
10
Internal Revenue Service. Instructions for Form 6198 – At-Risk Limitations