Form 1040 NOL: Calculation, Carryforward, and 80% Cap

A net operating loss on your Form 1040 is what remains after you take a year of negative taxable income and strip out the items the tax code will not let contribute to a business loss: prior NOL carryforwards, the Section 199A deduction, non-business deductions that exceed non-business income, and certain capital losses. If a negative number survives all of those adjustments, that figure is your NOL, and it carries forward indefinitely against future income, subject to an 80% cap.¹

Getting the number right matters. Every dollar you overstate or understate compounds across every future year the loss follows you.

What Qualifies as a Net Operating Loss

An NOL begins with total deductions exceeding total income on Form 1040, but the loss has to come from business activity. The common sources are a sole proprietorship, rental operations, farming, or your share of losses passed through from a partnership or S corporation.¹

The business versus non-business split runs through the whole calculation. Business items are what you report on Schedules C, E, and F. Non-business income covers interest, dividends, and non-business capital gains. Non-business deductions include most itemized deductions (medical, mortgage interest on your home) and the standard deduction. The rule that governs everything else: non-business deductions can only offset non-business income, and any excess cannot enlarge your NOL.²

Filters Your Loss Must Clear First

Before a business loss reaches the NOL calculation, four other limitations apply in order, and skipping a step produces the wrong number.³

Basis limitations. Partnership and S corporation losses are capped at your tax basis in the entity. Excess losses are suspended until basis increases.
At-risk limitations. Losses from an activity are limited to the cash you put in plus amounts you borrowed and are personally liable for.
Passive activity limitations. Passive losses (rental activities for most taxpayers) can only offset passive income. Unused amounts carry forward.
Excess business loss limitation. What remains is then tested against an annual cap.

The Excess Business Loss Cap

The excess business loss (EBL) rule, computed on Form 461, caps how much net business loss can offset non-business income like wages, interest, or dividends in a single year.⁴ For 2026, the threshold is $256,000 for single filers and $512,000 for joint filers.⁵ Anything above the threshold is disallowed in the current year and treated as an NOL carryforward to the next year.⁶

Calculating the NOL

Negative taxable income on Line 15 of Form 1040 does not automatically mean you have an NOL. That figure has to be adjusted by removing items the code does not allow to contribute to the loss. Form 172 walks through the adjustments.⁷

Add These Back

Any NOL deduction claimed this year from a prior year’s loss. You are measuring only the loss generated this year.
The Section 199A qualified business income deduction. It is based on income rather than an actual expense.⁷
Excess non-business deductions. If your non-business deductions exceed your non-business income, add back the excess. Because the standard deduction is a non-business deduction, taxpayers who take it generally add the full amount back. Itemizers add back only the portion above their non-business income.²

The standard deduction add-back is the one that surprises people. A -$50,000 taxable income figure shrinks immediately by the full standard deduction if you claimed it.

Capital Loss Treatment

Capital losses are segregated. Non-business capital losses can only offset non-business capital gains. Business capital losses can only offset business capital gains. Any excess is excluded from the NOL computation.² Gains and losses from selling depreciable business property or business real estate (Section 1231 assets) count as business items here, even though they get capital treatment elsewhere.

Once you have run every adjustment, if the number is still negative, that is your NOL. If the adjustments push you to zero or above, you have no NOL for the year despite the negative taxable income.

Carrying the Loss Forward

NOLs arising in tax years after 2020 carry forward indefinitely. There is no expiration date. Carrybacks were generally eliminated for most taxpayers.⁷

The 80% Taxable Income Cap

When you apply an NOL to a later year, it cannot wipe out all your income. For NOLs arising after December 31, 2017, the deduction is capped at 80% of taxable income calculated without the NOL deduction itself, the QBI deduction, or the Section 250 deduction.² At least 20% of your future taxable income will always face tax, no matter how large the carryforward balance.

Older NOLs (from tax years before 2018) are applied first and can offset 100% of taxable income. The 80% cap applies only to the post-2017 portion, calculated against what remains after the older loss is used.² Anything left after the cap moves forward again, subject to the same limitation each year.

Farming Losses Can Still Go Back

The main exception to the no-carryback rule is farming. The portion of your NOL attributable to farming income and deductions carries back two years, computed as if only farming items were on the return.² You can elect to waive the carryback and only go forward; the election is due with the loss-year return (including extensions) and is irrevocable.

Reporting the Deduction

The NOL carryforward is entered on Schedule 1 (Form 1040), Line 8a, as a negative number in parentheses. It sits in Part I (Additional Income) and reduces the total flowing into adjusted gross income.⁸ Complete Form 172 to document the calculation and attach it to your return.⁷

Two Things the NOL Does Not Do

An NOL carryforward does not reduce self-employment tax. Section 1402(a)(4) excludes the NOL deduction from the self-employment income calculation.⁹ You still owe the full 15.3% on this year’s business earnings even while a prior-year NOL is knocking down your income tax. Current-year business expenses reduce both taxes; the carryforward reduces only income tax.

An NOL does not automatically translate to your state return either. Many states do not fully conform to the federal rules and may impose shorter carryforward periods, different percentage caps, or dollar limits. Check your state’s rules before assuming a dollar-for-dollar match.

Records to Keep

An NOL can follow you for years. Keep records for any year that generated an NOL for three years after the carryforward is fully used or expires.¹⁰ That means the original return, the Form 172 or worksheet showing how you computed the NOL, and each subsequent return where you claimed a portion. A six-figure loss stretched across a decade needs every link in the chain documented, because the IRS can question the deduction at any point during that stretch.

1
Internal Revenue Service. Publication 536 – Net Operating Losses for Individuals, Estates, and Trusts
2
Office of the Law Revision Counsel. 26 US Code 172 – Net Operating Loss Deduction
3
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
4
Internal Revenue Service. About Form 461, Limitation on Business Losses
5
Internal Revenue Service. Revenue Procedure 2025-32
6
Internal Revenue Service. Instructions for Form 461
7
Internal Revenue Service. Instructions for Form 172
8
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
9
Office of the Law Revision Counsel. 26 US Code 1402 – Definitions
10
Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts