Net Operating Loss (NOL): §172 Carryforward Rules & 80% Limit (2026)

A net operating loss arises when a taxpayer's deductions exceed gross income in a tax year. The NOL can be carried forward to offset income in future years - reducing future tax dollar for dollar. TCJA fundamentally changed NOL mechanics in 2018: the 2-year carryback was eliminated for most taxpayers, and carryforwards are limited to 80% of taxable income in the absorption year. Understanding these limits is essential for cash tax forecasting and planning.

Current NOL Rules (Post-TCJA, OBBBA)

Carryback: No carryback for most taxpayers. Exceptions: farming losses (2-year carryback preserved), casualty and theft losses, and certain insurance companies.

Carryforward: Indefinite - no expiration. Can carry forward forever until fully absorbed.

80% limitation: NOL carryforward deductions are limited to 80% of taxable income (before the NOL deduction) in the absorption year. You cannot use an NOL to reduce taxable income below 20% of pre-NOL taxable income.

CARES Act NOLs (2018-2020): Had a 5-year carryback. Those years are closed. Track separately as pre-2021 NOLs may have different rules.

How the 80% Limit Works in Practice

If a corporation has $1,000,000 of taxable income in 2026 and $800,000 of NOL carryforward, it can use only $800,000 (80% x $1,000,000). It pays tax on $200,000 and carries the remaining $0 forward. If it had $2,000,000 of NOL carryforward, it could still only use $800,000 - carrying $1,200,000 forward indefinitely.

The 80% limitation means profitable companies with large NOL pools always pay some current tax. A company emerging from losses with $50M of NOL carryforward but $10M of annual income will pay 21% tax on $2M each year (20% of $10M) regardless of how large the NOL is. This changes cash tax planning materially compared to pre-TCJA when NOLs could fully shelter income.

What Creates an NOL

Only business and casualty losses create NOLs - not personal deductions. For individuals, the NOL computation adjusts taxable income by adding back personal exemptions (now $0), the standard deduction, capital losses in excess of capital gains, and non-business deductions exceeding non-business income. The result is the NOL available for carryforward. Most individual NOLs arise from Schedule C business losses, rental losses (if the at-risk and passive activity rules are met), or casualty losses.

Ordering and Tracking Multiple NOL Years

When multiple NOL carryforward years exist, the oldest NOL is absorbed first (FIFO). Each carryforward year must be tracked separately because pre-2018 NOLs (if any remain from CARES Act carrybacks) are not subject to the 80% limit - only post-2017 NOLs are limited. A mixed pool requires a layered absorption schedule tracked on Form 1045 or Form 1139 and Schedule A of those forms.

IRC §172 (net operating loss deduction - carryforward rules, 80% taxable income limitation, carryback restrictions); IRC §172(a) (deduction allowed for NOL carrybacks and carryforwards); IRC §172(b)(1)(A) (carryforward period - indefinite for post-2017 NOLs; no expiration); IRC §172(b)(1)(B) (farming loss - 2-year carryback preserved post-TCJA); IRC §172(d) (modifications to taxable income in computing NOL - add back standard deduction, personal exemptions, excess capital losses, non-business deductions); IRC §172(f) (80% limitation - NOL carryforward deduction limited to 80% of taxable income computed without the NOL deduction; applies to post-2017 NOLs only); TCJA P.L. 115-97 §13302 (eliminated general 2-year carryback; eliminated 20-year carryforward limit; imposed 80% limitation; effective for tax years beginning after December 31, 2017); CARES Act P.L. 116-136 §2303 (5-year carryback for 2018-2020 NOLs; temporary suspension of 80% limit for those years - now expired); Form 1045 (Application for Tentative Refund - individual NOL carryback claims); Form 1139 (Corporation Application for Tentative Refund - corporate NOL claims); IRS Publication 536 (Net Operating Losses for Individuals, Estates, and Trusts - computation worksheets, carryforward tracking).

Net Operating Loss: §172 Carryforward, 80% Limit & Carryback Rules

How the 80% Limit Works in Practice

What Creates an NOL

Ordering and Tracking Multiple NOL Years