What Is a Net Operating Loss Carryback and How Does It Work

A net operating loss carryback lets you apply this year’s business loss against income from earlier years and recover taxes you already paid. For losses arising after 2020, though, that option is closed to almost everyone. Only farming businesses and non-life insurance companies can still carry an NOL back, and the window is two years. Every other business carries the loss forward instead, subject to an 80% cap on how much taxable income it can offset in any single future year.¹

Who Can Still Carry a Loss Back

The Tax Cuts and Jobs Act permanently repealed the general two-year carryback. Two narrow exceptions survived:

Losses from a farming trade or business can be carried back two years.²
Non-life insurance companies keep a two-year carryback under a separate provision of the same statute.²

If your loss doesn’t fit one of those, no carryback is available and the rest of this article’s filing sections don’t apply to you. Skip ahead to the carryforward section.

One boundary worth flagging: the CARES Act briefly allowed a five-year carryback for NOLs arising in 2018, 2019, or 2020.³ That window is closed for new losses. It only matters now if you have an unfiled claim from one of those specific years.

Carry Back or Waive and Carry Forward

If you qualify for a carryback, you can still choose to skip it and carry the loss forward instead. The election is irrevocable, so run the numbers both ways before deciding.

A carryback tends to pay off when your tax rate in the two earlier years was higher than what you expect going forward. It also delivers the refund as a lump sum rather than spreading the benefit over several future returns. Carrying forward can produce more total tax savings if you expect higher income ahead, though the 80% deduction cap on carryforwards slows how fast the loss gets used.

To waive the carryback, attach a statement to your original return for the NOL year (filed by the due date, including extensions) electing to waive under Section 172(b). If you filed on time and forgot the statement, you have six more months from the original due date (without extensions) to make the election on an amended return; write “Filed pursuant to section 301.9100-2” at the top of the statement.¹

Filing for a Quick Refund

The fastest way to get a carryback refund is a tentative refund application. The form depends on your entity:

Corporations file Form 1139, Corporation Application for Tentative Refund.⁴
Individuals, estates, and trusts file Form 1045, Application for Tentative Refund.⁵

Both must be filed within 12 months after the end of the tax year in which the loss arose.⁶ For a calendar-year farming business with a 2025 loss, that means December 31, 2026. Miss the deadline and the tentative refund process is gone, though the amended return route stays open longer.

On the form, you recompute your tax for each carryback year: take the taxable income you originally reported, apply the loss, and show the lower tax. The gap between the tax as originally filed and the tax as recomputed is the refund you’re claiming. You’ll need your filed returns from those earlier years so your figures line up with what the IRS already has.

What to Attach

For Form 1139, corporations attach the first two pages of the loss-year return, all schedules that produced the carryback (such as Schedule D or Form 3800), any Form 8886 that was on the original return, applicable election statements, and the carryback-year forms and schedules for the items you’re refiguring.⁴

Form 1045 calls for a similar set of attachments from the loss year for individuals. If alternative minimum tax applied in any carryback year, you refigure that too, using Form 6251 for individuals or Form 4626 for corporations.⁵ Both forms now accept electronic filing through Form 8453-TR.⁴

If You Missed the 12-Month Window

You can still claim a carryback refund on an amended return. Individuals use Form 1040-X; corporations use Form 1120-X.⁷

The amended return generally must be filed within three years after the due date (including extensions) of the return for the loss year.⁸ That’s a much longer runway than the tentative refund’s 12 months. The tradeoff is speed. Amended returns run through normal processing, which typically takes months. Tentative refund applications get a faster turnaround by statute.

What Happens After You File

The IRS has 90 days from receipt of a Form 1139 or 1045 to review the application and issue the refund. This review is limited: the agency checks the math, looks for obvious omissions, and confirms the claimed loss is facially valid. It isn’t an audit.⁶

Getting the refund doesn’t mean the loss is settled. The IRS can still audit the underlying NOL later, and if the loss turns out to have been overstated, you’ll owe back the excess plus interest. Keep the ledgers, bank records, receipts, and workpapers that support the calculation. A clean paper trail is what turns an audit into a short conversation.

If You Can’t Carry Back: The Carryforward Rules

For every taxpayer outside the two exceptions, and for farmers or insurers who elect to waive the carryback, the loss carries forward instead. Two rules govern how it gets used:

The deduction is capped at 80% of that year’s taxable income (computed without the NOL deduction and certain other deductions) for any NOL arising after 2017 and used in a tax year after 2020. The remaining 20% of income stays taxable no matter how much accumulated loss you have.¹

The upside: carryforwards no longer expire. Before the 2017 changes, losses ran out after 20 years but were fully deductible. Now they last indefinitely, just at a slower pace. The 80% cap does not apply to a farming loss carried back to a tax year before 2021.¹

1
Internal Revenue Service. Instructions for Form 172
2
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
3
Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions
4
Internal Revenue Service. Instructions for Form 1139 (Rev. December 2025)
5
Internal Revenue Service. Instructions for Form 1045 (2025)
6
Office of the Law Revision Counsel. 26 USC 6411 – Tentative Carryback and Refund Adjustments
7
Internal Revenue Service. Instructions for Form 1120-X (Rev. December 2025)
8
Internal Revenue Service. Instructions for Form 1040-X