Articles · Basics · Corporate Tax and Form 1120
Net Operating Losses: How They Work
A net operating loss (NOL) arises when allowable deductions exceed income in a year. Tax law lets the taxpayer use that loss against income in other years.
Current rules
For most taxpayers, NOLs arising after 2020 cannot be carried back. They carry forward indefinitely, but they can offset only up to 80% of taxable income in a later year. Certain farming and insurance losses have different rules, and older NOLs may follow earlier rules.
A short example
A corporation has a $100,000 NOL carryforward and $60,000 of taxable income before the NOL. It can use $48,000, which is 80% of $60,000. Taxable income is $12,000, and $52,000 of the NOL carries forward.
Points to watch
Individuals calculate an NOL differently, because nonbusiness items are restricted. Section 461(l) can also limit excess business losses before an NOL arises.
An ownership change can limit a corporation's future use of NOLs under Section 382. State NOL rules often differ too, so a separate schedule by state is good practice.
Key takeaways
- Most NOLs now carry forward only.
- Use is generally limited to 80% of taxable income.
- Track federal and state NOLs separately.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.