Guides
Net Operating Loss (NOL): Rules, Carryforwards, and Limits
A net operating loss (NOL) arises when a taxpayer’s allowable tax deductions exceed gross income for the year. Under current federal rules, most NOLs cannot be carried back, they carry forward indefinitely, and the deduction in any future year is capped at 80% of taxable income. Two separate limits, Section 461(l) for individuals and Section 382 for corporations after an ownership change, can restrict how much loss you actually use.
The rules changed sharply with the Tax Cuts and Jobs Act (TCJA) of 2017 and again with the One Big Beautiful Bill Act (OBBBA) in 2025. The year a loss arises determines which rule set applies, so treating all NOLs the same is the most common and most expensive mistake.
What is a net operating loss?
A net operating loss is the amount by which business deductions exceed business income in a tax year, computed with specific adjustments under IRC Section 172. It is a tax concept, not a book-accounting figure, and it lets a loss year offset income in profitable years so tax follows economic reality over time rather than a single 12-month snapshot.
Not every item counts. To compute the NOL, you generally add back the NOL deduction itself, the qualified business income (QBI) deduction under Section 199A, the Section 250 deduction, and nonbusiness deductions that exceed nonbusiness income. Individuals figure this on Form 172, which replaced the older Schedule A of Form 1045 for computing the NOL.
Capital losses of noncorporate taxpayers are limited to capital gains plus $3,000 in this calculation, so a stock loss alone rarely creates an NOL. The loss has to come from operating a trade or business, wages, or casualty events. The starting point for an individual is adjusted gross income, then the Section 172 adjustments strip out the items that do not belong in an NOL.
Post-TCJA NOL rules: carryback, carryforward, and the 80% limit
For NOLs arising in tax years beginning after December 31, 2017, the TCJA set three rules that still govern most losses: no carryback for most taxpayers, an indefinite carryforward period, and an 80% of taxable income cap on the deduction. These replaced the prior 2-year carryback and 20-year carryforward regime.
The table below contrasts the two regimes, because losses generated in each period follow their own rules even on the same return.
| Rule | Pre-2018 NOLs | Post-2017 NOLs (current) |
|---|---|---|
| Carryback | 2 years | None (most taxpayers); farming losses keep a 2-year carryback |
| Carryforward | 20 years | Indefinite |
| Deduction limit | 100% of taxable income | 80% of taxable income |
| Compute on | Old Form 1045 Sch. A | Form 172 |
The 80% cap works on income before the NOL, QBI, and Section 250 deductions. Even if carryforwards exceed your income, you deduct at most 80% and pay tax on the remaining 20%, so a profitable company with large loss carryforwards may still owe tax.
One timing nuance: the CARES Act suspended the 80% limit for tax years beginning before January 1, 2021, and briefly restored a 5-year carryback for 2018 through 2020 losses. That window has closed. For any loss year 2021 forward, the standard post-TCJA rules apply.
How NOL carryforwards are ordered and applied
When you carry forward NOLs from more than one year, you apply them oldest first, and the 80% limit is tested year by year against that year’s income. This ordering can matter when older pre-2018 losses (no 80% cap) sit alongside newer capped losses, because using the older losses first may free up more current deduction.
Each year you use part of a carryforward, you track the remaining balance on Form 172 and carry it to the next return. Indefinite carryforward removes the old risk that a 20-year clock expires before you return to profit, but it does not remove the 80% annual ceiling, which can slow how fast a large loss is absorbed.
The excess business loss limitation (Section 461(l))
Section 461(l) caps how much net business loss a noncorporate taxpayer can deduct against nonbusiness income (wages, interest, capital gains) in a single year. Losses above the inflation-adjusted threshold are disallowed for that year and roll into your NOL carryforward, where the 80% rule then applies. OBBBA made this limit permanent in 2025, removing its scheduled 2028 sunset.
OBBBA also reset the indexing so the 2026 thresholds fell below 2025. The disallowed excess does not vanish; it converts to an NOL you use in later years.
| Filing status | 2025 threshold | 2026 threshold |
|---|---|---|
| Single | $313,000 | $256,000 |
| Married filing jointly | $626,000 | $512,000 |
Example of the mechanics: a joint filer in 2026 with $800,000 of net business loss and $900,000 of wages can deduct only $512,000 against the wages. The remaining $288,000 is disallowed for 2026 and becomes an NOL carryforward, deductible in future years subject to the 80% cap. This limit is computed on Form 461 and applies after the passive activity and basis rules, not before.
Corporate NOLs and Section 382 after an ownership change
C corporations follow the same 80% and indefinite-carryforward rules, but a change in ownership can trigger a separate cap under Section 382. This anti-abuse rule stops a profitable buyer from acquiring a loss company mainly to use its NOLs against unrelated income, a practice called loss trafficking.
An ownership change occurs when 5% shareholders increase their combined ownership by more than 50 percentage points over the lowest point in a rolling three-year testing period. After that change, pre-change NOLs are limited each year to the corporation’s value at the change multiplied by the federal long-term tax-exempt rate.
That rate was 3.56% for February 2026 ownership changes and 3.58% for March 2026. So a loss company valued at $10 million that changes hands in February 2026 could use only about $356,000 of pre-change NOLs per year, regardless of how large the carryforward is. We cover the mechanics in depth in our guide to the Section 382 NOL limitation.
Worked example: a corporate NOL carryforward with the 80% cap
Assume a C corporation has these results, with no ownership change and all losses arising after 2020.
| Year | Taxable income before NOL | NOL generated | NOL used | Tax at 21% | Carryforward remaining |
|---|---|---|---|---|---|
| 2024 | ($500,000) | $500,000 | 0 | $0 | $500,000 |
| 2025 | $300,000 | 0 | $240,000 | $12,600 | $260,000 |
| 2026 | $400,000 | 0 | $260,000 | $29,400 | $0 |
In 2025, the 80% cap limits the deduction to $240,000 (80% of $300,000), leaving $60,000 taxed at 21%, so $12,600 is owed even though $500,000 of losses existed. In 2026, the remaining $260,000 is below 80% of that year’s $400,000 income, so the full balance clears and tax applies to the other $140,000. The loss is fully absorbed, just more slowly than the pre-2018 100% rule would have allowed.
This is why modeling the 80% cap matters for cash planning. A loss does not guarantee zero tax in the recovery years, a point that also flows through deferred tax asset accounting under ASC 740 on the financial statements.
Frequently asked questions
Can you still carry back a net operating loss?
For most taxpayers, no. NOLs arising in tax years beginning after 2020 cannot be carried back and must be carried forward. The main exception is farming losses, which keep a 2-year carryback that a taxpayer may elect to waive. Property and casualty insurance companies also have distinct carryback rules. The temporary CARES Act carrybacks for 2018 through 2020 losses have expired.
How long can an NOL be carried forward?
Post-2017 NOLs carry forward indefinitely until fully used, replacing the old 20-year limit. Pre-2018 NOLs still follow the 20-year window and expire if unused. The indefinite period removes expiration risk, but the 80% annual deduction cap can extend how many years a large loss takes to absorb, since you cannot use more than 80% of taxable income in any single year.
What is the 80% taxable income limitation?
The 80% rule caps the current-year NOL deduction at 80% of taxable income figured before the NOL, QBI, and Section 250 deductions. It applies to post-2017 losses used in years after 2020. In practice, a company with carryforwards larger than its income still pays tax on at least 20% of that income. Pre-2018 losses are not subject to this cap and can offset 100%.
Is the excess business loss limit the same as an NOL?
No, but they connect. Section 461(l) first limits how much business loss an individual can deduct against nonbusiness income in the current year. The disallowed excess then converts into an NOL carryforward for future years, where the separate 80% limit applies. The 2026 thresholds are $256,000 single and $512,000 joint after OBBBA reset the indexing.
Do state NOL rules match the federal rules?
Often not. Many states decouple from federal NOL provisions, applying their own carryforward periods, caps, or add-back rules, and some suspended NOL deductions in certain years for revenue reasons. A loss usable federally may be limited or timed differently at the state level, depending on the state and entity type. Confirm each state’s conformity before relying on a carryforward.
Does an NOL guarantee a refund?
Not by itself. Because carrybacks are gone for most taxpayers, an NOL generally produces a future deduction rather than a refund of prior taxes. The benefit is realized only when you have taxable income to offset, and even then only up to 80% of that income per year. The value also depends on future tax rates, which is why NOLs appear as deferred tax assets, sometimes with a valuation allowance.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.