NOL Carryforward Rules: The 80 Percent Limit Explained
What a net operating loss is, why it can no longer be carried back, the indefinite carryforward, and the 80 percent taxable income cap
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A net operating loss (NOL) arises when a taxpayer's allowable deductions exceed income for the year — usually because a business lost money. NOLs from tax years after 2017 cannot be carried back (except farming losses) but carry forward indefinitely, and in any later year the deduction is limited to 80 percent of taxable income. Pre-2018 NOLs follow older rules.
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What does NOL stand for, and who has one?
Net operating loss. An individual has one when business losses (from Schedule C, Schedule F, a partnership or S corporation K-1, or rental activities, after the passive and at-risk limits) exceed the taxpayer's other income and are not fully absorbed in the year. Corporations compute NOLs on their own returns. For individuals, the computation on Form 172 (introduced in December 2024, replacing Schedule A of Form 1045 and the Publication 536 worksheets; Publication 536 is no longer revised) starts from negative taxable income and adds back items that cannot generate an NOL: the NOL deduction itself, nonbusiness deductions in excess of nonbusiness income (the standard deduction beyond investment income, for example), the capital loss deduction, and the qualified business income deduction. The result is usually smaller than the raw negative taxable income.
The rules, before and after 2018
| NOLs arising before 2018 | NOLs arising after 2017 | |
|---|---|---|
| Carryback | 2 years (with elections to waive) | None — except farming losses (2 years) |
| Carryforward | 20 years | Indefinite |
| Limit in the carryforward year | Up to 100 percent of taxable income | 80 percent of taxable income (computed without the NOL deduction) |
| Ordering | Oldest first | Pre-2018 NOLs are used first, without the cap; post-2017 NOLs then apply subject to the 80 percent cap on the remaining income |
| Interaction with the excess business loss limit | Not applicable | The disallowed excess business loss becomes an NOL carryforward |
The 2020 pandemic legislation temporarily allowed five-year carrybacks for 2018–2020 losses and suspended the 80 percent cap for tax years before 2021; those provisions have expired, and losses from 2021 onward are under the permanent post-2017 rules.
How does the 80 percent limit work?
In a carryforward year, the NOL deduction cannot exceed 80 percent of taxable income figured before the NOL deduction (and before the QBI deduction). A taxpayer with US$100,000 of taxable income and a US$150,000 NOL carryforward deducts US$80,000, pays tax on US$20,000, and carries US$70,000 forward. The cap guarantees some tax in every profitable year, however large the loss bank, and it is the reason a large NOL is rarely absorbed as fast as the owner expects — the year after a big loss is still a tax-paying year.
How does the excess business loss limit feed the NOL?
For noncorporate taxpayers, business losses are first limited by the excess business loss rule (an indexed annual cap on the net business loss that can offset non-business income — the excess business loss guide). The disallowed excess is not lost; it becomes an NOL carryforward to the next year, subject to the 80 percent cap there. So a large single-year loss reaches the taxpayer in two pieces: the amount under the cap in the loss year, and the rest as an NOL over the following years.
What records and forms are involved?
The NOL computation for the loss year (Form 172), a carryforward schedule tracking each year's NOL, its origin year, and the amount used each year (the IRS does not track it for you, and a missing schedule on a later examination means a disallowed deduction), and — for corporations — the NOL deduction line on Form 1120 with the same schedule. State NOL rules differ widely: many states have their own carryforward periods and caps, some do not allow NOLs at all, and the state schedule is tracked separately.
Worked example
A contractor's business loses US$220,000 in a bad year (a failed project); he is single, has US$30,000 of investment income, and takes the standard deduction. The excess business loss cap for the year (US$256,000 for a single filer in 2026) is not exceeded, so the full loss offsets his other income: adjusted gross income is negative US$190,000, and taxable income is negative US$206,100 after the US$16,100 standard deduction. NOL computation: add back the nonbusiness deduction (the standard deduction) to the extent it exceeds nonbusiness income (US$30,000) — the standard deduction is less than US$30,000, so no add-back; add back nothing else. NOL: US$206,100, carried forward indefinitely. Next year the business earns US$150,000 and he has US$30,000 of investment income; taxable income before the NOL is about US$163,900 (using the 2026 standard deduction); the NOL deduction is capped at 80 percent — US$131,120; he pays tax on US$32,780 and carries US$74,980 forward. Year three absorbs the rest.
Frequently asked questions
What does NOL stand for?
Net operating loss — the amount by which a taxpayer's allowable deductions exceed income for the year, computed with adjustments that remove nonbusiness deductions and certain other items.
Can I carry back a net operating loss?
Not for losses arising after 2017, except farming losses (two years). Post-2017 NOLs carry forward only.
How long can I carry an NOL forward?
Indefinitely, for losses arising after 2017. Pre-2018 losses carry forward 20 years.
What is the 80 percent limitation?
In any carryforward year, the NOL deduction from post-2017 losses cannot exceed 80 percent of that year's taxable income computed before the NOL deduction. The unused portion carries forward.
Official sources
The Instructions for Form 172 state: “Only NOLs arising after 2017 and carried forward to a year after 2020 are subject to the 80%-of-taxable-income limit. The total amount of any NOL deduction for 2021 or thereafter that is attributable to NOLs from tax years after 2017 can’t exceed 80% of taxable income without regard to the NOL deduction or sections 199A or 250.” — Internal Revenue Service, Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, https://www.irs.gov/instructions/i172
The Instructions for Form 461 state: “You’ll need to keep a record of your excess business loss from each tax year because it’s treated as an NOL carryover for subsequent taxable years.” — Internal Revenue Service, Instructions for Form 461, Limitation on Business Losses, https://www.irs.gov/instructions/i461
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles NOL computation and carryforward schedules, excess business loss coordination, state NOL tracking, and loss-year planning for pass-through owners. See pricing or book a call.
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