A net operating loss carryforward expiration depends on when the loss was generated: NOLs from tax years beginning after December 31, 2017 carry forward indefinitely and never expire, but they can only offset up to 80% of your taxable income in any year. Losses from tax years beginning before 2018 expire 20 years after they arose, with any unused balance permanently lost, though while they last they can offset 100% of income.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction If you hold losses from both sides of that 2018 line, the sequencing rules force you to use the older ones first, which is usually what you want anyway.
Pre-2018 Losses Expire After 20 Years
An NOL that arose in a tax year beginning before January 1, 2018 can be carried forward for 20 taxable years. After that, it’s gone. A loss from 2005 expired at the end of 2025. A loss from 2010 expires at the end of 2030. There’s no extension, no relief provision, and no way to recover a forfeited balance.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
The tradeoff for the expiration clock is that these older losses face no percentage cap. If your taxable income is $500,000 and you have $500,000 in pre-2018 NOLs, you can wipe out that income entirely.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Under prior law these losses could also be carried back two years to recover taxes on earlier profitable years, but that general carryback has since been repealed for most taxpayers.
Section 172(b)(2) also enforces an ordering rule: the oldest loss gets applied first, then the next oldest, and so on. Practitioners often call this FIFO. It matters because a loss nearing its 20-year deadline needs priority, and the statute takes that decision out of your hands.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
Say you hold a $100,000 NOL from 2006 and a $50,000 NOL from 2015, and your 2026 taxable income is $40,000. The full $40,000 is absorbed by the 2006 loss. The remaining $60,000 of that 2006 loss must be used by the end of 2026 or it disappears. The 2015 loss survives until 2035. Tracking each loss year by year is the only way to keep an older loss from lapsing while a newer one sits unused.
Post-2017 Losses Never Expire, but Face an 80% Cap
The Tax Cuts and Jobs Act eliminated the 20-year clock for losses arising in tax years beginning after December 31, 2017. Those NOLs carry forward indefinitely and won’t expire simply because time passed.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
The restriction is that these losses can only offset 80% of your taxable income in any year, measured before the NOL deduction itself. A corporation with $1 million in pre-deduction taxable income can use at most $800,000 in post-2017 NOLs, leaving $200,000 subject to tax. The unused portion carries to the next year.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction Even a very large loss takes years to absorb this way, and you’ll always owe something in a profitable year when only post-2017 losses are available.
The TCJA also ended the general two-year carryback for these losses. The CARES Act temporarily overrode that rule and allowed 2018, 2019, and 2020 losses to be carried back five years, but that window has closed.{2Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions Any NOL generated in 2021 or later is carryforward-only, aside from the industry exceptions below.
The TCJA’s NOL changes for C corporations have no scheduled sunset.
Using Losses From Both Sides of 2018 in the Same Year
If you hold both pre-2018 and post-2017 NOLs, the sequencing has real dollar consequences. The statute requires pre-2018 losses to be applied first, oldest first, and only after those are exhausted do the post-2017 losses come in. The 80% cap only kicks in once you reach the post-2017 layer.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
This works in your favor twice. It uses up the losses that can expire before the ones that can’t, and it lets your pre-2018 balance offset 100% of income while it lasts.
Here’s the math with real numbers. Assume $200,000 in pre-2018 NOLs, $500,000 in post-2017 NOLs, and 2026 taxable income of $300,000 before any NOL deduction. The pre-2018 losses absorb the first $200,000 at 100%, leaving $100,000. The 80% cap then applies against that remaining $100,000, so you can use $80,000 of the post-2017 losses. Taxable income lands at $20,000. The remaining $420,000 in post-2017 losses carries forward indefinitely.
Getting this ordering wrong is one of the more common errors the IRS looks for. Your records need to show which vintage each loss belongs to, how much was applied in each year, and the remaining balance by vintage after every return.
Ownership Changes Can Function Like an Expiration
Even an indefinite carryforward can be effectively neutralized if the corporation holding the NOL undergoes a significant ownership change. Section 382 imposes an annual dollar cap on how much pre-change NOL the company can use, which often turns a large loss into a slow trickle of deductions.{3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
An ownership change is triggered when one or more 5-percent shareholders increase their combined ownership by more than 50 percentage points over a three-year testing period. Stock sales, mergers, new equity issuances, and restructurings can all set it off.{4eCFR. 26 CFR 1.382-2T – Definition of Ownership Change Under Section 382
The annual cap equals the fair market value of the loss corporation’s stock immediately before the change, multiplied by the IRS-published long-term tax-exempt rate. That rate has recently been around 3.5%. A company worth $10 million before the change would face an annual usage cap near $350,000, regardless of how much income it earns.{3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
Unused cap in a year rolls forward and increases the next year’s limit. But if the new owners fail to continue the old company’s business enterprise for at least two years after the change, the annual limit drops to zero and the deduction is wiped out.{3Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
The Section 382 cap applies to both pre-2018 and post-2017 NOLs that existed before the ownership change, and it runs independently of the 80% income limitation. A post-change corporation can face both at once.
Farming and Insurance Businesses Follow Different Rules
Two industries retain carryback rights the rest of us lost. Farming businesses can still carry losses back two years. The amount eligible for carryback is the smaller of the net loss attributable to farming activities or the total NOL for the year.{1Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
Non-life insurance companies, such as property and casualty insurers, are exempt from the 80% taxable income cap that applies to other taxpayers. Their NOLs can offset 100% of income the way all NOLs did before the TCJA, and they retain a two-year carryback.{5Federal Register. Consolidated Net Operating Losses If you operate in either industry, the standard summary doesn’t fully describe your situation.
State NOL Rules Are Often Stricter
Most states with an income tax have their own NOL provisions, and they often diverge from federal treatment. Some states conform to the indefinite federal carryforward. Others impose their own expiration periods, commonly 15 or 20 years. Several cap the annual deduction at a dollar amount rather than or in addition to a percentage of income. A handful have temporarily suspended NOL deductions entirely during budget shortfalls and reinstated them later.
Many states either don’t allow carrybacks or limit them more tightly than the federal rules ever did. If you operate in multiple states, each state’s rules govern the NOLs attributable to income earned there. A loss that lives forever on your federal return might still expire on your state return, leaving a permanent gap between the two.
You Have to Track Your Own Balances
The IRS doesn’t maintain a running balance of your NOL carryforwards. That’s on you. For each loss vintage, your records should show the original loss amount, the year it arose, the amount applied in each subsequent year, and the remaining balance. If you hold losses from both sides of the 2018 line, document which set of rules governs each and show that the ordering was followed.
Publication 536, the IRS guide for individuals computing NOLs, is no longer being updated. Its last revision covers 2023.{6Internal Revenue Service. About Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts The statute stays current, but the publication won’t reflect anything after that revision date.
Individuals report the NOL deduction on Schedule 1 of Form 1040. Corporations report it on Form 1120. In both cases the 80% limitation is calculated on an internal worksheet rather than on the return itself. A Section 382 limitation adds another tracking schedule on top of that. With this many overlapping rules, the cost of professional help usually pays for itself in mistakes not made.