Net Operating Loss (NOL) Carryforward
A net operating loss occurs when allowable deductions exceed gross income for the year, and the NOL rules determine whether that loss can offset income in other years. Under 26 U.S.C. § 172, post-2017 NOLs generally carry forward indefinitely but can offset only up to 80% of taxable income in a given year. Older pre-2018 NOLs follow a different carryforward and carryback structure. For startups, farms, capital-intensive businesses, and owners coming out of a bad year, NOLs can be a major future tax asset, but only if they are tracked correctly and not trapped by special limitations such as § 382.
Current Law (2026)
| Parameter | Pre-2018 NOL (arose before Jan 1, 2018) | Post-2017 NOL (arose after Dec 31, 2017) |
|---|---|---|
| Carryforward period | 20 years | Indefinite |
| Carryback allowed | 2 years (general) | None (eliminated by TCJA) |
| Deduction cap | No cap (100% of taxable income) | 80% of taxable income (§ 172(a)(2)) |
| Farming loss carryback | 2 years | Special carryback rules remain available for certain farming losses |
| Insurance company NOL | Special rules apply | Special rules apply, including non-life insurance company carryback/carryforward treatment |
| Parameter | Value |
|---|---|
| Core statute | 26 U.S.C. § 172 (NOL deduction) |
| Ownership-change limit | § 382 — limits NOL use after >50 percentage-point ownership shift in 3-year window |
| Excess credits after ownership change | § 383 — same § 382 limitation applies to unused general business credits and minimum tax credits |
| Pre-acquisition losses | § 384 — preacquisition losses cannot offset built-in gains of an acquired corporation for 5 years |
| CARES Act temporary carryback | 5-year carryback for 2018–2020 NOLs (now expired, returns already filed) |
| 80% cap computation base | Taxable income before NOL deduction, § 199A QBI deduction, and § 250 FDII/GILTI deductions |
| Farming loss definition | § 263A(e)(4) farming businesses only; elected on return; irrevocable for that year |
Legal Authority
- 26 U.S.C. § 172 — Net operating loss deduction: establishes the carryforward/carryback rules, the 80% cap, and special rules for farming losses, insurance companies, and real estate investment trusts
- 26 U.S.C. § 382 — Limitation on net operating loss carryforwards following ownership change: caps annual NOL use at the equity value of the old corporation multiplied by the long-term tax-exempt rate (the "§ 382 limitation")
- 26 U.S.C. § 383 — Special limitations on certain excess credits: applies § 382-style limits to unused general business credits (§ 39) and minimum tax credits (§ 53) after an ownership change
- 26 U.S.C. § 384 — Limitation on preacquisition losses against built-in gains: prevents acquired companies from using existing NOLs to shelter gains that were already baked into the target's assets at acquisition
- TCJA § 13302 (2017) — Enacted the 80% cap and eliminated general carrybacks for post-2017 losses
How the NOL Rules Actually Work
An NOL is calculated on your tax return (Schedule C or corporate Form 1120) by subtracting all deductible business expenses, depreciation, and allowable losses from your gross income. If the result is negative, that number is your NOL for the year.
For post-2017 losses, the NOL carries forward to the next tax year and reduces that year's taxable income — but only up to 80% of what would otherwise be taxable income. If you have a $500,000 NOL and next year's income is $400,000, you can deduct $320,000 (80% x $400,000), leaving $80,000 of taxable income and carrying forward the remaining $180,000 of the NOL to future years.
For pre-2018 losses, the rules are more generous: they can offset 100% of taxable income and generally expire after 20 years. If you have both pre-2018 and post-2017 NOLs, pre-2018 losses are used first.
The 80% limitation means that even in a profitable recovery year, a business that had significant losses will owe some tax — you can never fully shelter income with post-2017 NOLs unless your taxable income happens to exactly match 80% absorption.
The § 382 Ownership Change Trap
Section 382 is the main anti-abuse rule for NOLs, and it catches many startup founders and M&A deals off guard. If there is an "ownership change" — defined as one or more 5%-or-greater shareholders increasing their aggregate ownership by more than 50 percentage points over any 3-year testing period — then the annual amount of NOL you can use is limited.
The § 382 limitation equals the fair market value of the old loss corporation's stock on the change date, multiplied by the long-term tax-exempt rate published by the IRS. So if a startup was worth $10 million when a financing triggered an ownership change, and the applicable rate produced a 4% limitation, the annual NOL usage cap would be about $400,000. The unused NOL does not automatically disappear, but it may become usable only slowly over future years.
If the company stops its business entirely within two years of the ownership change, the § 382 limitation drops to zero and the NOLs are essentially lost.
A different and more complete NOL elimination occurs in § 338 elections: when a buyer makes a § 338(g) or § 338(h)(10) election, the target is deemed to have sold all assets and liquidated (the "old target" ceases to exist). This wipes out the NOLs entirely — they don't survive the deemed liquidation to flow to the "new target." The § 382 limitation becomes moot because there are no NOLs left. Buyers modeling a § 338 election must weigh the value of the stepped-up asset basis against the permanent loss of any target NOL carryforwards.
Who This Affects Most
Startups and early-stage companies are the primary beneficiaries of NOL carryforward. A startup that loses $3 million in its first two years, then becomes profitable in year three at $2 million taxable income, can use $1.6 million of NOL (80% x $2M) to reduce its tax bill substantially — leaving $1.4 million of NOL to carry forward.
Real estate investors also generate large NOLs, particularly from cost segregation studies and accelerated depreciation on commercial properties. However, passive activity loss rules (§ 469) may limit how quickly those losses are absorbed. When property is sold, the timing of NOL use against gain is a key planning issue.
Farms and agricultural businesses retain the ability to carry NOLs back two years under special farming loss rules, which can generate refunds in years when commodity prices were high — a major cash-flow tool for family farms hit by drought or price crashes.
C corporations vs. pass-throughs: For C corporations, the NOL is an entity-level attribute. For S corporations, partnerships, and LLCs, losses pass through to individual owners' returns and are governed by basis rules (§ 705), at-risk rules (§ 465), and passive activity rules before reaching the § 172 NOL stage.
Tracking and Ordering Rules
The IRS requires careful tracking of NOL origins because pre-2018 and post-2017 NOLs have different rules and different expiration dates. Form 1139 (corporations) or Form 1045 (individuals) is used to claim carryback refunds when applicable. For individuals, estates, and trusts, the IRS now points taxpayers to the instructions for Form 172 for current NOL computation guidance.
When multiple NOL years are carried forward, pre-2018 losses are used before post-2017 losses (since pre-2018 losses expire). Post-2017 losses are used in the order they arise (FIFO).
The 80% limitation is applied after pre-2018 NOLs have been deducted from taxable income. So if you have both types, the pre-2018 loss reduces the income base that the 80% cap is applied to.
State Variations
State NOL rules vary significantly and are independent of federal rules:
- California conformed to the pre-TCJA rules for many years and has suspended NOL deductions during fiscal crises
- New York generally follows federal rules but with state-specific modifications
- Texas has no corporate income tax (it levies a franchise tax), so federal NOL rules are largely irrelevant at the state level
- Pennsylvania did not allow NOL carryforwards at all until 2017 legislation — and still has significant limits
- Many states do not allow the indefinite carryforward that federal law now provides; some cap at 5 or 10 years
Businesses operating in multiple states must track state NOLs separately from federal NOLs, which adds substantial compliance complexity.
How It Affects You
If your business had a significant loss year: The NOL is a real asset — it reduces your future tax bills dollar for dollar (subject to the 80% cap for post-2017 losses). Track it carefully on your tax return: post-2017 NOLs carry forward indefinitely, so a $200,000 loss in 2024 stays available until you have enough income to absorb it. The 80% annual cap means in any year, you can only use the NOL to offset up to 80% of your taxable income — you can never zero out your entire income with a post-2017 NOL, which is important to know when doing estimated tax planning. If you have losses from before 2018, those follow old rules: they carry forward for only 20 years but are not subject to the 80% cap and can eliminate income completely. Use pre-2018 losses first, since they expire; post-2017 losses don't.
If you're a startup or early-stage company: Your NOL balance is a genuine financial asset. Many startup founders don't realize their accumulated losses can offset future profitable years — sometimes for years or decades of deferred tax. However, § 382 is the critical trap: if your company undergoes an "ownership change" (any stock transaction resulting in one or more 5%+ shareholders increasing their total ownership by more than 50 percentage points over 3 years), your ability to use accumulated pre-change NOLs is capped annually at the "§ 382 limit" — the company's value before the ownership change multiplied by the long-term tax-exempt rate (a modest IRS-set rate). A startup with $10 million in accumulated losses might find its NOL usability capped at $200,000/year after a large VC round that creates an ownership change. Model this before any major equity financing round, and ask your tax advisor whether the funding will trigger § 382.
If you're acquiring a company: Always have a tax advisor perform a § 382 analysis on the target's NOL schedule before close. Any acquisition that crosses the ownership-change thresholds creates a § 382 limitation on how fast you can use the target's NOLs post-acquisition. Equally important: look at § 382(c) — if the acquired company doesn't survive as a functioning business, pre-change NOLs can be fully eliminated. The presence (or absence) of a large NOL carryforward can significantly affect the deal economics, but only if you actually model whether and when the NOL becomes usable.
If you're a sole proprietor or self-employed individual: A bad business year that creates an NOL can reach beyond your business income and offset your wages, investment income, or any other income in future years. On your Form 1040, the NOL flows through Schedule C (or E for partnerships/S-corps), reducing your adjusted gross income to potentially zero — and if the loss exceeds your total income for the year, you have an individual NOL to carry forward. The 80% cap applies to individual NOLs too (post-2017 losses), but the indefinite carryforward means the loss doesn't expire. If you had a large business loss in 2022 or 2023 from a startup or COVID-related downturn, check your prior year returns — you may have an NOL carryforward that can reduce your 2025 or 2026 tax bill.
Pending Legislation (119th Congress)
As of April 8, 2026, no enacted federal law has displaced the core § 172 structure described above. The general federal rule still distinguishes between older pre-2018 NOLs and post-2017 NOLs, and the TCJA-era indefinite carryforward plus 80% cap for post-2017 NOLs remains the governing baseline.
Recent Developments
The CARES Act (2020) temporarily allowed 5-year carrybacks for 2018, 2019, and 2020 NOLs — a major COVID-era relief provision that is now historical rather than current law.
- 2025-2026 IRS guidance: The IRS now directs individuals, estates, and trusts to the instructions for Form 172 for current NOL computation guidance rather than continuing to revise Publication 536.
- Section 382 remains a live planning issue: Annual IRS rate publications continue to set the long-term tax-exempt rate used in
§ 382ownership-change calculations, so financing rounds and M&A transactions can still materially reduce the practical value of NOL carryforwards. - State conformity still diverges: Businesses operating in multiple states must continue to track state NOL rules separately because state carryforward periods, carrybacks, and deduction caps do not necessarily match federal law.