A net operating loss carryforward lets you apply a business loss from one tax year against taxable income in later years, and under the rules in effect for losses generated after 2017, that carryforward has no expiration date but can only wipe out up to 80% of any future year’s taxable income.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction So a large loss becomes a long-term tax asset, but it never fully shelters a profitable year. The mechanics around calculating the loss, ordering multiple carryforwards, and preserving the deduction have enough moving parts that mistakes are common and expensive.
What a Net Operating Loss Actually Is
You have an NOL when the deductions the tax code allows you exceed your gross income for the year. The raw negative number on your return, though, is not the figure the IRS will recognize as an NOL. Several modifications strip the calculation down to what the law considers a genuine business loss.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Individuals, C corporations, and certain estates and trusts can all generate an NOL. Partnerships and S corporations cannot claim one at the entity level. Their losses pass through to the partners or shareholders, who factor those amounts into their own returns.
For individual taxpayers, the key modifications are:
- Capital losses can only offset capital gains. A net capital loss does not increase your NOL.
- No deduction for personal exemptions is allowed in the calculation.
- Non-business deductions, such as the standard deduction or most itemized deductions, can only offset non-business income like interest and dividends. If those deductions exceed your non-business income, the excess drops out of the NOL computation.
- The Section 199A qualified business income deduction is excluded.
The non-business deduction rule trips up more filers than any other. If you claim a $14,600 standard deduction but have only $3,000 in interest and dividends, only $3,000 of that deduction survives into the NOL figure.1Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction The IRS provides Form 172 and Schedule A of Form 1045 as worksheets that walk through these modifications.2Internal Revenue Service. Instructions for Form 172 (12/2024)
How the Carryforward Works After 2017
The Tax Cuts and Jobs Act of 2017 changed the rules for losses arising in tax years beginning after December 31, 2017. Two features define the current regime:
- Losses carry forward indefinitely. The old 20-year expiration is gone for post-2017 losses.
- The deduction in any carryforward year is capped at 80% of that year’s taxable income, computed without the NOL deduction itself.
The 80% cap is the trade-off for indefinite life. At least 20% of your current-year taxable income stays taxable no matter how large the accumulated loss sitting behind it.3Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses Whatever you cannot use in a given year continues to roll forward.
Older Losses Still on Your Books
If you still have NOLs from tax years before January 1, 2018, the pre-TCJA rules apply to those specific losses. They can offset 100% of taxable income in the carryforward year without the 80% haircut.4Internal Revenue Service. Publication 536 (2023) – Net Operating Losses for Individuals, Estates, and Trusts The catch is the 20-year expiration that came with the older regime. A loss generated in 2017 expires after tax year 2037 if not used. Track those dates. Once a pre-2018 loss lapses, it is gone.
Carrybacks Are Gone for Most Taxpayers
Under current law, the standard rule is carryforward only. You cannot carry a post-2020 loss back to a prior year. Two exceptions remain:
Farming losses. The portion of an NOL attributable to a farming business can be carried back two years. Eligible taxpayers may elect to waive the carryback and carry the farming loss forward instead, but the election is irrevocable for that tax year.5Office of the Law Revision Counsel. 26 US Code 172 – Net Operating Loss Deduction
Non-life insurance companies. These insurers can carry NOLs back two years and forward up to twenty. They are the only major category that still faces a finite carryforward window.6Internal Revenue Service. Instructions for Form 1139
If neither exception applies, forward is your only direction.
Ordering When You Have Losses From Multiple Years
Once you accumulate NOLs from more than one loss year, you do not get to pick which one to use first. The IRS requires you to apply the earliest loss year’s NOL before any later one. After the oldest NOL is deducted, you recalculate taxable income and apply the next oldest, and so on.2Internal Revenue Service. Instructions for Form 172 (12/2024)
This ordering interacts with the 80% cap in a way that favors you. Pre-2018 losses go first and can absorb 100% of taxable income. Only after those are exhausted do post-2017 losses come into play, subject to their 80% ceiling.4Internal Revenue Service. Publication 536 (2023) – Net Operating Losses for Individuals, Estates, and Trusts If older losses fully cover the year, newer ones roll forward untouched.
The Excess Business Loss Gate
Individual taxpayers face a separate limit before the NOL rules even engage. Section 461(l) caps the total net business losses you can deduct against non-business income in a single year. For 2025, the threshold is $313,000 for single filers and $626,000 for joint filers, indexed for inflation. The limitation is scheduled to run through at least 2028.
The important part for carryforward planning: any business loss above the threshold is not lost. It gets reclassified as an NOL carryforward to the next tax year, where it becomes subject to the same 80% income limitation as any other post-2017 NOL.2Internal Revenue Service. Instructions for Form 172 (12/2024) Passive activity limits and at-risk rules apply before this calculation, which makes Section 461(l) effectively the last filter that shapes what enters the carryforward pipeline.7Internal Revenue Service. Excess Business Losses
Claiming a Carryforward on Your Return
Carrying a loss forward is straightforward mechanically. You claim the NOL deduction on your regular return for the carryforward year. For individuals, it appears on Schedule 1 of Form 1040. Attach a computation using Form 172 or Schedule A of Form 1045 showing how the loss was figured, plus Schedule B of Form 1045 if you are tracking a carryover from a prior partial use.4Internal Revenue Service. Publication 536 (2023) – Net Operating Losses for Individuals, Estates, and Trusts
If you qualify for the farming or insurance carryback, individuals and estates file Form 1045 (corporations use Form 1139) within 12 months after the end of the loss year for a tentative refund, which the IRS processes within 90 days. An amended return on Form 1040-X is an alternative with a longer filing window but a much slower refund.8Internal Revenue Service. Instructions for Form 1045 – Application for Tentative Refund
An NOL Does Not Cut Self-Employment Tax
This one catches people. An NOL carryforward deduction does not reduce your self-employment tax. Federal law specifically excludes the NOL deduction when calculating net earnings from self-employment. So even if your carryforward zeroes out taxable income, you still owe full self-employment tax on your current Schedule C or Schedule F earnings, and a refund driven by an NOL will not include any refund of self-employment tax previously paid.9Internal Revenue Service. Instructions for Form 1040-X (12/2025)
Section 382 Limits After a Corporate Ownership Change
Corporations sitting on large NOLs face an extra restriction if ownership shifts. When shareholders owning at least 5% of a loss corporation increase their combined stake by more than 50 percentage points over the testing period, Section 382 caps how much of the pre-change NOL the company can use each year.10Office of the Law Revision Counsel. 26 US Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
The annual cap equals the value of the old loss corporation multiplied by the long-term tax-exempt rate the IRS publishes monthly. For January 2026, that rate is 3.51%.11Internal Revenue Service. Rev. Rul. 2026-2 A company valued at $10 million at the moment of the ownership change could use at most $351,000 of pre-change NOLs per year. Unused portions of the annual cap carry to the next year, but the pace is fixed. If you are on either side of a deal involving a corporation with meaningful carryforwards, this limitation shapes the value of those losses to the buyer.
Keep the Paperwork Longer Than You Think
Because post-2017 losses have no expiration, recordkeeping becomes a long game. The IRS instructs taxpayers to keep records supporting an NOL for three years after the carryforward is fully used or after it expires.2Internal Revenue Service. Instructions for Form 172 (12/2024) Generate a large loss in 2025 and finish absorbing it in 2040, and you need the underlying 2025 records available through at least 2043. Nearly two decades of retention. Losing the source documents behind a carryforward is one of the more common and costly NOL mistakes: the IRS can disallow the entire deduction if you cannot substantiate the original loss. Preserve digital copies of the returns, schedules, and workpapers behind the loss.
State Rules Are Their Own Puzzle
Federal NOL rules do not automatically apply at the state level. States set their own carryforward periods, carryback rules, and income offset caps. Some mirror the federal 80% ceiling; others allow 100% offset. A few states have temporarily suspended NOL deductions for higher-income taxpayers. State carryforward windows commonly run five to twenty years rather than being indefinite, and some states impose dollar caps on annual use. If your business files in more than one state, you will need to track a separate NOL balance for each.