How to Prepare an NOL Deduction Statement for Form 1041

An NOL deduction statement for Form 1041 should list the tax year each loss originated, show the computation that produced the NOL amount, give a year-by-year history of how much of each loss has already been used, state the deduction being claimed this year on Line 15b, and end with the remaining carryforward balance. The IRS requires this statement any year an estate or trust claims a net operating loss deduction, and Publication 536 says the attachment must show “all the important facts about the NOL” and include “a computation showing how you figured the NOL deduction.”¹ If the current deduction draws on losses from more than one year, each originating year is addressed separately.

The Five Things the Statement Has to Show

Work through the attachment in this order and nothing gets skipped:

The tax year or years the loss arose. If the current deduction pulls from more than one originating year, list every year with its loss amount.
The NOL computation. Start from Form 1041 taxable loss, then show the add-backs for the distribution deduction and the exemption. The reader should be able to follow the math from the return figure to the final NOL without guessing.
The utilization history. For each originating year’s loss, list how much was applied in every prior tax year. That running ledger is what proves the current balance.
The current-year deduction, the amount going on Line 15b of Form 1041.²
The remaining carryforward after subtracting this year’s deduction. That balance carries into next year’s statement.

Attach the statement to Form 1041 every year an NOL deduction appears on Line 15b. It’s also worth attaching the computation in the year the loss first arises, even though no deduction is claimed yet, because that original-year documentation makes every future statement easier to prepare and easier to defend on audit.

How the NOL Amount Differs From the Loss on the Return

The Form 1041 taxable loss is not the NOL. Two deductions that reduce the entity’s taxable income are disallowed for NOL purposes and have to be added back.

The first is the distribution deduction, the amount the fiduciary passed through to beneficiaries. The second is the exemption. For 2025, that exemption is $600 for a decedent’s estate, $300 for a trust required to distribute all income currently, and $100 for most other trusts.² Adding them back increases the taxable income figure, which shrinks the loss.

The direction trips people up. The add-backs make the NOL smaller than the number on the return, not bigger. If Form 1041 shows a taxable loss of $40,000 and the fiduciary claimed a $10,000 distribution deduction and a $600 exemption, the NOL is $29,400. Not $50,600. Those deductions inflated the loss on the return, and the statute strips them back out to isolate the true operating shortfall.

Use Form 172 to Do the Math

Estates and trusts calculate the NOL on Form 172. Part I of the form walks through the NOL computation itself, including the required adjustments. Part II tracks how the loss is applied in each carryover year and calculates the remaining balance.³

Form 172 is the backbone of the attached statement. Some fiduciaries attach the completed form itself as the statement. Others prepare a separate schedule that mirrors the Form 172 calculation in a more readable layout. Either works, as long as the math is transparent and the five elements above are all on the page.

Tracking the 80% Limitation in the Utilization History

The utilization history isn’t just a running total. It has to reflect how much of each year’s loss could actually be used, and that depends on when the loss arose.

Losses that arose in tax years beginning after December 31, 2017, can offset only up to 80% of the current year’s taxable income, calculated without regard to the NOL deduction itself, the qualified business income deduction, or the Section 250 deduction.³ The remaining 20% of taxable income stays taxable no matter how large the carryforward is. There’s no time limit on carrying these losses forward, but the 80% cap applies every year.

Losses from tax years beginning before 2018 still offset 100% of taxable income under the pre-TCJA rules. When an estate or trust holds both, the pre-2018 losses are applied first, and the 80% cap only bites on the post-2017 portion.⁴ The statement should break losses out by originating period so the right limitation is visible on the face of the schedule.

The Final-Year Statement: Passing Losses to Beneficiaries

When an estate or trust files its final Form 1041, any unused NOL carryforward does not disappear. It transfers to the beneficiaries who succeed to the entity’s property under Section 642.⁵

The final-year statement carries extra weight because of this. Report the unused NOL on each beneficiary’s final Schedule K-1 in Box 11, using code E for the regular NOL carryover and code F for any AMT NOL carryover.⁶ The beneficiary claims the deduction on their Form 1040 in the tax year that coincides with the entity’s final year.

Alongside the K-1, the fiduciary’s final statement should include the full utilization history through the entity’s last year, the originating year of each remaining loss, and the amount passing to each beneficiary. Beneficiaries need those originating years to apply the correct limitation on their own returns, and they need the utilization history if the IRS ever questions the number they claimed. A documentation gap at this stage can make the deduction very hard to defend later.

One Boundary: Excess Business Losses

Before the NOL rules even engage, an estate or trust with substantial business activity has to run business losses through Section 461(l). For 2025, business losses above $313,000 for a single filer are classified as an “excess business loss.”⁷ The joint-filer threshold does not apply to estates or trusts. The excess portion cannot be deducted in the current year. It’s automatically converted into an NOL carryforward to the next year and enters the NOL system there. Form 461 is attached to Form 1041 to document that computation, and the amount then shows up in next year’s NOL statement as a loss originating in the current year.

1
Internal Revenue Service. Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
2
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025)
3
Internal Revenue Service. Instructions for Form 172 (12/2024)
4
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
5
Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
6
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025)
7
Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses