Net Operating Loss Carryforward Rules for Businesses

A net operating loss (NOL) arises when a year's business deductions exceed its income. The net operating loss carryforward, also called an NOL carryover, is the mechanism in IRC 172 that moves that loss into future years and deducts it there. The rules changed twice in recent years, so the answer to “how long and how much” depends on when the loss arose. This post covers the carryforward and carryback periods by loss year, the 80% of taxable income limit, how individuals and corporations figure and report an NOL, the excess business loss rule that sits in front of it for owners, and the section 382 limit after a change in ownership.

Carryforward and carryback periods, by the year the loss arose

Two rules follow from the table. A loss is carried to the earliest year to which it may be carried, then to each later year in order (IRC 172(b)(2)), so a business does not get to choose which year absorbs it. And because there is no carryback for a 2026 loss, the only way to turn it into cash is future taxable income. A farming loss is the exception: it goes back 2 years unless the taxpayer elects out by the return due date, including extensions, and that election is irrevocable.

The 80% of taxable income limit

For tax years beginning after 2020, IRC 172(a)(2) allows a deduction equal to the pre-2018 NOLs carried to the year, plus the lesser of the post-2017 NOLs carried to the year or 80% of taxable income. Taxable income for this purpose is computed without the NOL deduction itself, the section 199A qualified business income deduction and the section 250 deduction, and it is reduced first by any pre-2018 losses. In plain terms: an old loss can wipe out a year's income, while a new loss can offset only 80% of it, leaving 20% taxed no matter how large the carryforward.

The cap does not shrink the loss. The undeducted part remains in the carryforward, and the Form 172 instructions confirm that only losses arising after 2020 can no longer be carried back, while losses from years after 2017 are the ones subject to the 80% limit.

How individuals figure and claim an NOL

Sole proprietors, partners and S corporation shareholders carry business losses as individual NOLs; the entity itself generally has no NOL. The IRS moved the computation out of Publication 536 and onto Form 172 in December 2024, and the About Publication 536 page says the publication will no longer be revised. Part I of Form 172 figures the NOL for the loss year, applying the modifications in IRC 172(d): no NOL deduction from other years, capital losses only to the extent of capital gains, no personal exemption, and nonbusiness deductions only up to nonbusiness income. A loss from operating a business is the most common cause; rental losses and certain disaster losses count too. Part II figures how much carries to the next year after each year of use.

To deduct a carryforward, the instructions say to list the NOL deduction as a negative figure on Schedule 1 (Form 1040) for the year it is carried to and attach a Form 172 for each NOL year. Keep the records for 3 years after the year the loss is used up or expires. Form 1045, the tentative refund application, applies only when a loss is carried back, such as a farming loss, and its line 1a now reads “Net operating loss (NOL) (Form 172).”

How corporations report an NOL

A C corporation with a loss on Form 1120 line 30 has an NOL that carries forward under the same 172 rules. In a later year it enters the carryover on line 29a, not more than taxable income after special deductions, and attaches a statement showing the computation. The 2025 Form 1120 instructions restate the 80% limit for post-2017 losses, point to the Form 1139 instructions for the special rules and elections when a farming or insurance loss is carried back, and put the election to waive that carryback on Schedule K, item 11. They also flag the section 382 limit at line 29a, covered below.

Before the NOL: the excess business loss limitation

An individual owner does not reach section 172 until IRC 461(l) has been applied. That section disallows an “excess business loss,” the amount by which aggregate business deductions exceed aggregate business income plus a threshold. Section 70601 of P.L. 119-21 made the rule permanent (it had been scheduled to end for tax years beginning after 2028) and reset the inflation base year to 2024 for tax years beginning after 2025. The threshold is $313,000 ($626,000 joint) for 2025 per the Form 461 instructions and $256,000 ($512,000 joint) for tax years beginning in 2026 per Rev. Proc. 2025-32. Three things about how it works:

• Order. The Form 461 instructions apply the at-risk rules first, the passive activity rules next, and the excess business loss limit last; the loss is figured on Form 461 and applied at the partner or shareholder level for pass-through owners. Wages are not business income for this test.
• What happens to the excess. IRC 461(l)(2) treats the disallowed amount as an NOL for the year, so it becomes part of next year's NOL carryover and then meets the 80% limit like any other post-2017 loss. The deduction is deferred, not lost.
• Why it matters for equipment buyers. A large first-year write-off from bonus depreciation or a cost segregation study can push an owner's business loss above the threshold, in which case part of the deduction lands in 2027 or later rather than 2026.

Section 382: NOLs after an ownership change

A corporation's carryforward survives a sale of the company, but IRC 382 limits how fast it can be used. An ownership change occurs when the percentage of stock owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage they owned during the testing period, generally the 3 years before. After that date, the taxable income that pre-change losses can offset each year is capped at the section 382 limitation: the value of the old loss corporation immediately before the change multiplied by the long-term tax-exempt rate, defined in 382(f) as the highest of the adjusted federal long-term rates in effect for the 3-month period ending with the month of the change. Any unused limitation carries forward and adds to the next year's cap. If the corporation does not continue its business enterprise for 2 years after the change, the limitation is zero and the pre-change losses are effectively gone. The same ownership change also limits unused credits under section 383, which our guide to the R&D credit carryforward covers.

NOLs sit beside a second cap on debt-financed businesses: interest disallowed under section 163(j) carries forward separately, under the rules in our guide to the business interest limitation, and the NOL deduction is left out when that section's adjusted taxable income is figured.

Sources: 26 U.S.C. 172, net operating loss deduction (text current through P.L. 119-111); IRS, Instructions for Form 172 (Rev. December 2024), Net Operating Losses for Individuals, Estates, and Trusts; IRS, About Publication 536 (no longer revised as of October 24, 2024); IRS, Instructions for Form 1045 (2025), Application for Tentative Refund; IRS, 2025 Instructions for Form 1120, line 29a and line 30; 26 U.S.C. 461(l), limitation on excess business losses of noncorporate taxpayers; Public Law 119-21, section 70601, extension and modification of limitation on excess business losses (July 4, 2025); IRS, Instructions for Form 461 (2025), Limitation on Business Losses; IRS Rev. Proc. 2025-32, sections 3.30 and 3.31 (2026 inflation adjustments); 26 U.S.C. 382, limitation on net operating loss carryforwards following ownership change. Rules, thresholds and form lines checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.