If your business deductions for the year came out higher than your income for the year, you may be sitting on a net operating loss. The good news is that the loss does not vanish. It can offset the tax you owe in other years.
Here is the short version for a loss you have today. You generally cannot carry it back to past years anymore. You carry it forward instead, for as long as it takes to use up, and it can wipe out up to 80 percent of your taxable income in any year you apply it.
The longer version has some history worth knowing, because the rules changed three times in recent years, and the year your loss arose decides which rules apply.
An NOL happens when your allowable deductions for the year exceed your income for the year. The business lost money on paper, and the tax code lets a taxpayer carry that loss to a profitable year so the tax tracks your average results over time.
Not every red number counts. The loss generally has to come from running a business, from rental property, or from a casualty or theft tied to a disaster. According to the IRS, a business loss is the most common reason for an NOL. Personal and nonbusiness deductions usually cannot be used to create or pad the loss, which is why your NOL is often smaller than the net income figure at the bottom of your tax return. A simple way to picture it: you have a loss in year 1, income in year 2, and the loss in year 1 can be used to offset income in any given later year, so you pay tax on the net amount.
For 2024 and later, individuals, estates, and trusts use Form 172 to calculate net operating loss and track it. This form is new. Before that tax year, the same NOL calculation lived in the worksheets inside Publication 536, and the Internal Revenue Service moved it onto a structured form.
Part I walks you through the loss for the current year, stripping out the nonbusiness items that are not allowed. Part II handles the carryover, landing the amount you carry to the next year. The result is the amount of the NOL you have available going forward. To have an NOL at all, the loss must come mainly from business activity, and the NOL must be figured under the law of its year. An estate or trust that holds business interests can generate one too, and figures it on the same form, with a few tweaks for that type of return. Corporations do not use this form. They reach the figure straight from their return, since it is close to the negative income on the corporate side.
Two words decide what you can do with the loss. An NOL carryback applies the loss to a past tax year, which can trigger a refund of tax you already paid. A loss carryforward applies it to future years to reduce tax you have not paid yet.
For most losses today, only one of those is on the table. You carry the loss forward and use it to offset future taxable income until it runs out. The trade is easy to feel: you give up the quick refund you once got, but you still get the full value of the loss, spread across the profitable years ahead. Used this way, the loss lowers your future tax and smooths out your tax liabilities across uneven years.
It helps to know where the current rules came from, because losses from older years still follow their original terms. For NOLs arising in tax years beginning before 2018, the loss could be carried back two years and carried forward 20 years, and it could fully offset income with no percentage limit.
So a business with a rough year could be carried back two years and carry them forward for 20 years if anything was left, which is also where the phrase two years and carry them forward comes from. Businesses could carry losses forward two decades before they expired, and a farmer or disaster-hit filer could even reach back further. That two years and carried forward 20 years pattern, sometimes written as carried back 2 years and forward for 20 years, was the standard for a long time. It still governs any pre-2018 loss sitting on a carryover schedule today.
This rewrote the rules for losses arising in tax years beginning after 2017. The TCJA made three big moves. It ended the ability to reach back for most taxpayers, so a refund from a prior year was off the table. It said NOLs can be carried forward indefinitely, dropping the old 20-year expiration. And it capped the yearly benefit.
That cap is the 80 percent limit. Under the TCJA, an NOL deduction is limited to 80 percent of your taxable income for the year you apply it, figured before the NOL itself. So with 100,000 dollars of income and a large loss carried in, your deductions are limited to 80 percent, letting you erase 80,000 dollars and still owe tax on the remaining 20,000. The carryforward allows businesses to apply whatever is left, and the rules now allow businesses and most filers to carry forward their NOLs indefinitely until the loss is gone. The law also added a separate excess business loss limitation for owners who are not corporations, which the Inflation Reduction Act later extended. Losses above that annual threshold are disallowed for now and become an NOL carryforward to the following year.
Then the pandemic scrambled things. The CARES Act temporarily let NOLs arising in tax years beginning in 2018, 2019, and 2020 be carried back five years, and it suspended the 80 percent cap for those years so the loss could offset 100 percent of income. That window has closed.
The strict rules now apply to NOLs arising in tax years beginning after 2020, which covers tax years 2021 and everything since. Carrybacks are generally eliminated. Most NOLs are carried forward, indefinitely, and the deduction is again limited to 80 percent of taxable income in any one tax period. One exception survives: certain farming losses may be carried back two years. So the year-by-year detour only matters if you are still cleaning up a 2018 to 2020 loss, and the tax questions regarding NOLs from recent years almost always land on the forward-only answer.
The same federal NOL rules apply to corporate taxpayers. A C corporation that posts a loss carries it forward indefinitely and meets the same 80 percent of taxable income limit when applying the NOL in a profitable year. Reaching back is off the table for post-2020 corporate losses, just as it is for everyone else, no matter the corporate tax rate in play.
A few wrinkles matter for planning. Partnerships and S corporations generally cannot claim an NOL themselves. Instead, the business income and losses flow through to the partners or shareholders, who figure their losses on their own returns. And federal NOL carryforwards do not automatically match your state. Many states set their own caps and windows, so a loss that businesses can carry forward cleanly at the federal level can behave differently on a state return. Checking both is part of getting the corporate income tax answer right.
On paper the idea is simple. In practice, NOLs go wrong when the carryover schedule is sloppy, when pre-2018 and post-2017 losses get mixed up, or when the 80 percent limit is applied to the wrong base. Each error quietly threads into the next year, and a single misclassification can follow a client for a decade of returns.
This is exactly the detail-heavy, rules-driven work that Madras Accountancy handles for US CPA firms, building clean loss carryforwards and keeping each loss tagged to the law of its year. For owners weighing how a loss reshapes the next few years, the fractional CFO support turns a loss into a real tax planning lever instead of a forgotten line item. If you want to talk through your firm's workload, you can reach out here. This is general information, not tax advice, so confirm the specifics for any client with their preparer.
1. What is a net operating loss?
An NOL is what you have when your deductible business expenses for the year are larger than your income for the year. The IRS lets you move that loss to another tax year, so you can deduct it to offset income when the business is profitable and your tax tracks your average results rather than one bad year.
2. Can you still carry back an NOL?
For most taxpayers, no. A loss arising in tax years beginning after 2020 generally may not be carried back and can only be carried forward. The main exception is certain farming losses, which may be carried back two years. Before the rules changed, businesses could carry losses back to grab a refund from a prior year.
3. How long can you carry forward an NOL?
Indefinitely, for any loss arising after 2017. There is no expiration, so you keep applying the loss until it is used up. Older pre-2018 losses follow different carryforward rules, since those were limited to a 20-year window.
4. What is the 80% NOL limitation?
For losses arising in years beginning after 2017, your NOL deduction is limited to 80 percent of taxable income in any given tax year you use it, figured before the NOL. You erase up to 80 percent of that income, pay tax on the rest, and keep the unused amount as an NOL carryover to later years.
5. What is Form 172?
Form 172 is the IRS form, new for the 2024 tax year, that individuals, estates, and trusts use to figure an NOL and track the carryover. It replaced the worksheets that used to sit inside Publication 536. Corporations do not file it.
6. Do corporations follow the same NOL rules?
Yes. Corporate taxpayers carry losses forward indefinitely, face the same 80 percent of taxable income limit, and generally cannot carry post-2020 losses back. The corporate calculation is more direct, since it is close to the negative income on the return.
7. Can estates and trusts have an NOL?
Yes. An estate or trust that runs a business or holds business interests can have one and figures it on Form 172, the same form individuals use. The calculation carries a few adjustments specific to estates and trusts.
8. Did the CARES Act change NOL carrybacks?
Temporarily. The CARES Act allowed five-year carrybacks for losses from tax years 2018, 2019, and 2020 and lifted the 80 percent cap for those years. The provision has expired, so NOLs from 2021 onward follow the stricter forward-only rules again.
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