Net operating loss carryforward: Definition and rules

If your business loses money in one year, you can often use those losses to lower your tax bill in future years. The net operating loss (NOL) carryforward is the IRS mechanism that makes this possible, helping you smooth out tax liability when profits swing from year to year.

What is a net operating loss?

A net operating loss (NOL) occurs when your tax deductions exceed your gross income for the year. The IRS lets you use that loss to reduce your taxable income in other years rather than letting it go to waste.

Several situations can create an NOL:

• Business losses: Operating expenses that exceed revenue
• Casualty and theft losses: Deductible property losses from events such as fires, storms, or theft
• Moving expenses: Qualifying moves for active-duty military members
• Rental property losses: Real estate operating losses that exceed rental income

NOLs are common for startups and businesses with unpredictable revenue, such as retail or construction. Large up-front investments and high operating costs often outpace early income, creating a temporary loss.

What is an NOL carryforward?

An NOL carryforward lets you apply current-year losses to future tax years. By reducing taxable income in profitable years, you lower the tax you owe down the road.

Carryforwards are now the primary way most taxpayers use NOLs, since the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated carrybacks for most businesses.

Why NOL carryforwards matter for your taxes

The main benefit of an NOL carryforward is straightforward: You can offset future profits with past losses, which directly lowers your future tax bills. You won't get an immediate refund for your loss year, but you'll pay less when your business turns profitable.

That trade-off can meaningfully improve cash flow during the years your business is growing or recovering. It also gives you a measure of tax predictability across uneven earning cycles.

Current NOL carryforward rules

The rules that apply today come primarily from the TCJA, with a few short-lived exceptions from the CARES Act. Here's what you need to know.

Indefinite carryforward period

NOLs from tax years beginning after 2017 can be carried forward indefinitely until they're fully used. The previous 20-year expiration no longer applies to these post-2017 losses.

The 80% limitation on NOL deductions

Your NOL deduction is capped at 80% of taxable income in any single year, calculated before applying the NOL itself. Any unused portion rolls forward to the next year.

For example, if you have $100,000 in taxable income and a large NOL carryforward, you can use the NOL to offset only $80,000 (80% of $100,000) of that income.

Federal NOL carryforward provisions

These rules apply at the federal level. Losses from before 2018 follow different rules, including a 20-year carryforward limit and no 80% cap.

For detailed guidance, refer to IRS Publication 536 and Form 172.

How to calculate a net operating loss

The basic formula is simple: Your deductions exceed your gross income. The complication comes for individuals, who must add back certain deductions, such as personal exemptions and some non-business deductions, to arrive at the final NOL amount.

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

NOL calculation for individuals

Individuals report income and deductions on Form 1040 and its related schedules, including Schedule 1. You'll need to separate business losses from personal deductions when calculating your NOL.

A few important rules apply:

• An NOL can't reduce self-employment tax
• You'll use Form 172 to calculate the NOL
• The worksheets in IRS Publication 536 walk you through the add-backs

NOL calculation for corporations

Corporations use Form 1120 to calculate their NOL. The math is generally simpler, since the NOL is essentially the negative taxable income figure on the return.

Corporations don't face the same add-back requirements for personal deductions, which makes the calculation more direct.

NOL carryforward vs. NOL carryback

A carryforward applies losses to future tax years, while a carryback applies them to past tax years to generate a refund. Here's how they compare:

Unlike the difference between a tax credit and a deduction, which directly lowers tax owed, an NOL carryforward reduces taxable income through a deduction.

When NOL carryback still applies

Carrybacks are still allowed in limited cases. Farming losses qualify for a two-year carryback, and certain insurance company losses can also be carried back.

The CARES Act temporarily allowed five-year carrybacks for losses in 2018 through 2020, but that provision has since expired.

When to elect carryforward only

Even when a carryback is available, you can elect to waive it and carry the loss forward instead. This makes sense if you expect to be in a higher tax bracket in future years, or if you want to preserve losses to offset anticipated profits.

The election is irrevocable for that loss year, so think carefully about your projected income before making it.

How NOL carryforward rules have changed over time

NOL rules have shifted significantly over the past decade. Knowing which version applies to your loss year matters for getting the calculation right.

Pre-2017 NOL rules

Losses from this period qualified for a two-year carryback and a 20-year carryforward. There was no percentage limitation on how much income the deduction could offset.

Tax Cuts and Jobs Act changes

The TCJA eliminated carrybacks for most taxpayers, made the carryforward indefinite, and added the 80% limitation on deductions. These changes apply to losses arising in tax years beginning after December 31, 2017.

CARES Act temporary provisions

For losses in 2018, 2019, and 2020, the CARES Act suspended the 80% limit and allowed a five-year carryback. Those temporary provisions have expired.

Current rules after 2020

NOLs are carried forward indefinitely, the 80% limitation is back in effect, and carrybacks aren't allowed except for specific exceptions such as farming and certain insurance companies.

NOL carryforward rules for individuals vs. corporations

Tax treatment varies meaningfully by entity type. Here's a look at what differs:

Individuals

• Use Form 1040 and Schedule 1 to claim the NOL deduction
• Must complete Form 172 to calculate the NOL
• Can't reduce self-employment tax with an NOL
• Subject to excess business loss limitations

Corporations

• Use Form 1120 to calculate and claim the NOL
• Simpler calculation without personal deduction add-backs
• 80% limitation applies to taxable income
• May face Section 382 limits after ownership changes

Knowing which rules apply to you is essential for strategic tax planning and minimizing liability.

State NOL carryforward rules

States don't always follow federal NOL rules. Some have shorter carryforward periods, different percentage limits, or don't allow NOL deductions at all.

Always check your state's tax laws before assuming a federal NOL flows through to your state return. If you operate in multiple states, the rules can vary significantly across each one.

How ownership changes affect NOL carryforwards

If your business is acquired or takes on a major investor, Section 382 of the tax code can limit how much of your NOL the new owners can use. This rule is critical for anyone navigating M&A or large funding rounds.

Section 382 limitations

Section 382 is triggered by an ownership change of more than 50 percentage points over a testing period (generally three years). The rule prevents companies from being acquired solely to harvest their tax losses.

Annual deduction limits after acquisition

After a Section 382 ownership change, the annual NOL deduction is capped at the company's equity value at the time of the change multiplied by the long-term tax-exempt rate. Unused amounts of this annual limit can accumulate, but if the cap is too low, the NOLs may effectively become worthless before they can be used.

If you're approaching a transaction, model the Section 382 impact early. Losses you've been counting on may shrink dramatically once the deal closes.

NOL carryforward example

Here's how a carryforward works in practice:

1. Calculate the NOL in the loss year: Your business has $200,000 in revenue and $350,000 in expenses, resulting in a $150,000 NOL for Year 1
2. Determine taxable income in the profitable year: In Year 2, your business has $500,000 in taxable income before any NOL deduction
3. Apply the 80% limitation: The maximum NOL deduction is 80% of taxable income: 0.80 * $500,000 = $400,000
4. Calculate the remaining carryforward: Since the $150,000 NOL is less than the $400,000 limit, you can use the entire $150,000. Taxable income for Year 2 is $500,000 – $150,000 = $350,000. The NOL is fully used, with no remaining carryforward.

How to track and manage net operating loss carryforwards

NOL carryforwards can deliver real tax savings, but only if you track them carefully across multiple years. Use this four-step approach:

1. Document each loss year

Keep detailed records of the original NOL amount, the tax year it occurred, and the supporting calculations from Form 172 or your corporate tax return. Without solid documentation, you'll struggle to defend the deduction if the IRS asks questions years later.

2. Track carryforward balances annually

Maintain a running schedule showing the opening balance, the amount used in the current year, and the remaining carryforward for each loss year. The worksheets in IRS Publication 536 are built for this purpose.

3. Monitor the 80% limitation

Each year, calculate the maximum allowable NOL deduction based on 80% of taxable income. Track how much of each loss year's NOL remains after the limitation, since unused amounts roll forward.

4. Coordinate NOLs with tax planning

Time your income recognition and deductions to make the most of your NOLs. If you have NOLs from multiple years, apply them in first-in, first-out (FIFO) order, using the oldest losses first.

A tax advisor can help you stay compliant with both federal and state rules, especially if you operate in multiple jurisdictions. Pair that expertise with finance automation tools to keep records consistent and reduce manual errors.

Track NOL carryforwards automatically with Ramp's AI-powered accounting tools

Net operating loss (NOL) carryforwards can significantly reduce your tax liability, but tracking them manually across multiple periods is time-consuming and error-prone. You need accurate records of when losses occurred, how much remains available, and which periods they apply to—all while ensuring your books reflect the proper tax treatment.

Ramp's AI-powered accounting software eliminates the manual work of tracking NOL carryforwards by automating transaction coding and period-end accruals. Every expense is coded in real time across all required fields, including tax categories, so you maintain the detailed records needed to calculate and apply NOL carryforwards accurately.

At period-end, Ramp automatically posts and reverses accruals so expenses appear in the proper accounting period, which is critical for calculating accurate NOLs. The platform's reconciliation workspace helps you tie out to the cent, surfacing any variances or missing entries that could affect your NOL calculations. You'll have complete visibility into your financial position across periods, making it easier to determine when to apply carryforwards and maximize your tax savings.

Try an interactive demo to see how Ramp automates the accounting workflows that support accurate NOL tracking and tax planning.