Net operating loss carryforward: What it is, rules, and examples

If your business experiences losses in one year, you might be able to use those losses to offset taxable income in later years. The net operating loss (NOL) carryforward offers important tax benefits, allowing businesses to reduce tax liability by applying losses to taxable income in subsequent years.

What is a net operating loss (NOL)?

A net operating loss (NOL) happens when deductible expenses are greater than gross income for the year, leaving you with negative taxable income. Both businesses and individuals can use NOLs to offset taxable income in future years.

When does an NOL occur?

NOLs are common for startups and industries with unpredictable revenue, like retail or construction. In these cases, large upfront investments and high reducing operating costs often outpace early income, creating a temporary loss.

How does NOL carryforward work?

An NOL carryforward lets you use a prior year’s loss to offset taxable income in a future profitable year. This reduces tax liability and spreads tax relief over time, helping to smooth out uneven earnings. See how it works in practice:

NOL carryforward rules and limitations

After 2017, the Tax Cuts and Jobs Act (TCJA) made carryforwards indefinite but capped them at offsetting 80% of taxable income per year. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily lifted this limit for 2018–2020, but the 80% cap applies again today.

Losses generated before 2018 follow older rules: they can be carried forward for up to 20 years and may offset up to 100% of taxable income each year until used.

NOL carryforward example

Suppose your company has a $500,000 NOL carryforward. In 2025, you generate $400,000 in taxable income:

Allowable deduction = 80% × $400,000 = $320,000

Taxable income after NOL = $400,000 – $320,000 = $80,000

The remaining $180,000 of unused NOL is carried forward to 2026 and beyond until it’s fully applied.

NOL carryforward vs. NOL carryback

NOLs can be applied in two ways: a carryback applies a loss to past tax years, while a carryforward applies it to future years. Carrybacks can generate immediate refunds for taxes already paid, whereas carryforwards reduce taxable income in years when the business is profitable.

Unlike the difference between a tax credit and a deduction, which directly lowers the tax owed, an NOL carryforward reduces taxable income through a deduction. Both approaches offset income with prior losses but operate on different timelines.

When each option is available

Since 2018, most taxpayers can only use carryforwards, as the Tax Cuts and Jobs Act eliminated carrybacks for most businesses.

There are limited exceptions: certain farming losses and insurance company losses may still be carried back two years. The CARES Act temporarily allowed five-year carrybacks for 2018–2020 losses, but that relief has expired.

For most businesses, carryforwards are the primary tool, especially when future profitability is expected.

How to calculate NOL

Calculating an NOL means starting with taxable income and then applying IRS adjustments. The general process looks like this:

1. Calculate your business’s gross income and net income to establish your baseline
2. Subtract allowable categories of business expenses, such as salaries, rent, utilities, or depreciation
3. Add back certain nonbusiness deductions, such as capital losses exceeding capital gains, personal exemptions, and qualified tax deductions for businesses

NOLs can offset taxable income in future years, but you can’t apply them against investment or passive income.

How to claim an NOL carryforward

Once you’ve calculated your NOL, you need to file the correct IRS forms and keep detailed records. Here’s how to do it:

1. Check eligibility: Post-2017 NOLs can be carried forward indefinitely but are subject to the 80% taxable income limitation
2. File the right tax forms: Corporations file Form 1120; partnerships and S corporations pass losses through to owners; self-employed sole proprietors file Form 1040
3. Track your NOLs: Use IRS Publication 536 and a worksheet to record the amount applied each year and the balance carried forward
4. Apply in future years: Deduct the allowable portion annually and update your records for the remaining balance

Best practices for NOL carryforwards

NOL carryforwards are an important part of long-term tax planning strategies. Use these best practices to maximize tax relief and avoid common mistakes.

Track NOLs regularly

Track NOLs each year, recording how much has been used and how much remains. Keep a worksheet showing the carryforward period, amounts applied to taxable income, and any carrybacks or prior-year NOLs.

Work with a tax professional

Partner with a tax advisor or accountant to ensure carryforwards are applied correctly, especially if you operate in multiple jurisdictions. A professional can help you stay compliant with federal and state rules and avoid errors.

Leverage tax software tools

Use tax software and finance automation tools to simplify calculations, track NOL balances, and automate reporting. This reduces manual errors and keeps your records consistent across systems.

Apply carryforwards strategically

If you expect higher profits in the future, consider applying NOL carryforwards strategically to reduce taxable income in those years. Remember, post-2020 deductions are limited to 80% of taxable income, so you may need to spread them over multiple years.

Review annually

Because NOL carryforwards can last indefinitely, revisit your plan every year. Decide whether to apply NOLs immediately or defer them, based on profitability forecasts, tax law changes, and upcoming filing deadlines.

Streamline NOL tracking with Ramp’s accounting software

Accurately calculating and applying NOL carryforwards depends on having clean, reliable financial records. Without precise tracking of income and expenses, it’s easy to miscalculate losses or miss opportunities to reduce future tax liability.

Ramp’s accounting automation software integrations take the guesswork out of the process. By automatically collecting receipts, consistently coding transactions, and syncing data in real time with QuickBooks, NetSuite, Xero, or Sage, we ensure your books stay accurate and audit-ready.

Our automation speeds up monthly close, flags errors before they become problems, and helps you save hours each month on repetitive tasks.

Ready to get started? Explore a free interactive product demo.