A net operating loss carryforward lets a business or individual apply a year’s tax loss against taxable income in later profitable years, cutting the tax bill in those years. For any NOL arising in a tax year beginning after December 31, 2017, the carryforward period is indefinite, but the deduction in any given year is capped at 80% of that year’s taxable income calculated before the NOL deduction.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Those two rules, together with a handful of adjustments and special limits described below, define how the carryforward actually works.
What Counts as a Net Operating Loss
An NOL is not just the negative number on your return. Section 172(d) requires specific adjustments to negative taxable income before the result qualifies as an NOL, and the adjustments differ for corporate and non-corporate taxpayers.2Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Individuals, Sole Proprietors, and Pass-Through Owners
For individuals, the calculation is designed to isolate genuine business losses from personal items. Non-business deductions can only offset non-business income; any excess is added back. Capital losses can only offset capital gains, and excess capital losses cannot feed the NOL. Any NOL deduction carried in from another year is removed so prior losses don’t compound the current one. The Section 199A qualified business income deduction is added back because it cannot create or enlarge an NOL.
Corporations
The corporate calculation is simpler because virtually all corporate income and deductions are treated as business-related. The primary adjustment is removing any prior-year NOL deduction from the current year’s computation. The dividends received deduction interacts with the NOL in one specific way: the taxable income limit on the DRD is calculated without regard to any NOL.
Where to Compute It
Individuals, estates, and trusts now compute the NOL on Form 172, which replaced the former Schedule A of Form 1045.3Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts Corporations report the deduction on Form 1120.
The 80% Taxable Income Cap
For any tax year beginning after December 31, 2020, the NOL deduction is limited to 80% of taxable income computed before the NOL deduction and before the Section 199A and Section 250 deductions.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction The math is direct. If your business earns $100,000 of taxable income, the maximum NOL deduction is $80,000, and you pay tax on the remaining $20,000. The unused portion stays in the carryforward pool for next year.
The cap only applies to post-2017 NOLs. If you still have pre-2018 losses in your pool, those older losses are applied first without the 80% limitation. Only after the pre-2018 balance is exhausted does the 80% cap begin to bite on the newer losses.3Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts That ordering rule matters, because it preserves the full value of the older, unrestricted losses.
How Long the Carryforward Lasts
An NOL arising in a tax year beginning after December 31, 2017, carries forward with no expiration date.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction This replaced the old 20-year cutoff for pre-2018 losses. A loss is never forfeited simply because time has passed; it stays available until fully used.
The Excess Business Loss Gate
Before the carryforward mechanics even come into play, non-corporate taxpayers hit a separate limit: the excess business loss rule under Section 461(l). This caps how much net business loss you can deduct in a single year. For 2025, the threshold is $313,000 for single filers and $626,000 for joint filers, adjusted annually for inflation. Any business loss above the threshold is disallowed for the current year, but it is not gone. The disallowed amount is automatically treated as an NOL carryforward to the following year.4Internal Revenue Service. 2025 Instructions for Form 461
The provision was originally set to expire after 2028, but the One Big Beautiful Bill Act permanently extended it and reset the base threshold amounts starting in 2026.4Internal Revenue Service. 2025 Instructions for Form 461 In practice, this is where most individual business owners first meet the NOL system: Section 461(l) converts their excess loss into a carryforward whether they planned for one or not.
Carrybacks Are Generally Not Allowed
Under the permanent rules, carrybacks are prohibited for post-2020 NOLs. You cannot apply a current-year loss to a prior year’s return to claim a refund. A temporary five-year carryback existed under the CARES Act for NOLs generated in 2018, 2019, and 2020,5Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions but that window is closed for newly generated losses.
The Farming Exception
Farming businesses get the one ongoing exception. For NOLs arising after December 31, 2017, a farming loss can be carried back two years, generating an immediate refund of tax already paid on the prior two years’ income.3Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts A farmer can irrevocably elect to waive the carryback and use the standard indefinite carryforward instead.1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction That election might make sense when the prior two years produced little tax to recover and future profits look strong, but once made it cannot be reversed.
Partnerships and S Corporations
Partnerships and S corporations do not compute or carry NOLs at the entity level. Income and losses flow through to the owners, who apply the NOL rules on their personal returns. A partner or S corporation shareholder combines the pass-through loss with their other income and deductions, then runs the Section 172(d) adjustments for non-corporate taxpayers. The excess business loss limitation, the 80% cap, and all carryforward tracking happen on the individual return, not on the entity’s return.
Section 382 After an Ownership Change
When a corporation with an NOL carryforward undergoes a major ownership change, Section 382 limits how much of the pre-change NOL can be used each year. The rule exists to stop a profitable company from acquiring a loss company primarily to absorb its tax losses.
An ownership change occurs when the percentage of stock held by one or more 5-percent shareholders increases by more than 50 percentage points during the three-year testing period. Once that happens, the annual limit on pre-change NOL use equals the value of the loss corporation’s stock immediately before the change, multiplied by the long-term tax-exempt rate published monthly by the IRS.6Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change For April 2026, that rate is 3.58%.7Internal Revenue Service. Rev. Rul. 2026-7
A quick example. A loss corporation worth $10 million at the ownership change with a 3.58% long-term tax-exempt rate can deduct no more than $358,000 of pre-change NOL in any post-change year, regardless of the total carryforward pool. Unused limitation can generally carry into the next year, but the annual constraint is real, and it should be modeled before any equity transaction closes.
How to Claim the Deduction
Individuals report the NOL deduction as a negative figure on Schedule 1 of Form 1040, which flows to the main return.8Internal Revenue Service. Instructions for Form 172 – Net Operating Losses for Individuals, Estates, and Trusts Corporations claim it on Form 1120. Attach a statement showing the NOL calculation, the 80% limitation, and the remaining carryforward balance. That paper trail is what protects the deduction if the IRS questions it years later.
For taxpayers eligible for a carryback (farming losses, principally), the faster route is the tentative refund procedure. Individuals file Form 1045; corporations file Form 1139.9Internal Revenue Service. About Form 1139, Corporation Application for Tentative Refund These forms must be filed within 12 months after the end of the NOL year.10Internal Revenue Service. Instructions for Form 1045 The IRS is required to process the application within 90 days from the later of the filing date or the last day of the month containing the due date of the income tax return.11Internal Revenue Service. 2025 Instructions for Form 1045 If you miss the 12-month window, the carryback can still be claimed on an amended return: Form 1040-X for individuals or Form 1120-X for corporations.12Internal Revenue Service. Form 1040-X – Amended U.S. Individual Income Tax Return
State Rules Are Their Own Calculation
State income tax rules for NOLs frequently diverge from the federal framework. Many states have not adopted the indefinite carryforward and instead cap it at 15 or 20 years. Some do not follow the 80% taxable income limit, applying a different percentage or none at all. A handful impose dollar caps on annual NOL deductions or periodically suspend them during budget shortfalls. States may also require separate computations with their own add-backs. If you operate across multiple states, you need a separate NOL balance for each; the federal balance tells you nothing about what remains available on any given state return.