Under post-TCJA rules made permanent in 2026, business losses carry forward indefinitely — but an 80% annual cap means even a large NOL still leaves some tax due each year.
A net operating loss (NOL) occurs when business deductions exceed income in a tax year. Post-TCJA rules — made permanent by the OBBBA in 2026 — let you carry losses forward indefinitely but cap the annual deduction at 80% of taxable income. No carryback applies for most businesses.
A net operating loss (NOL) occurs when your allowable business deductions exceed your gross income for the tax year. Rather than that loss disappearing, the tax code lets you carry it forward to offset taxable income in future profitable years — shrinking your tax bill in those years.
For small business owners, understanding how NOLs work under current law matters: the rules changed significantly with the 2017 Tax Cuts and Jobs Act (TCJA), and those changes were made permanent by the One Big Beautiful Bill Act (OBBBA) in 2026. The strategy that worked before 2018 — carrying losses back two years to generate quick refunds — is gone for most businesses.
IRS Publication 536 is the authoritative guide to calculating and claiming NOLs. This post explains how the rules work in 2026 and what they mean for your tax planning and funding applications.
Under IRS guidance for small businesses and self-employed taxpayers, a net operating loss arises when allowable deductions exceed gross income for the year — after specific IRS-required adjustments. For a sole proprietor, a net loss on Schedule C that produces a negative adjusted gross income is the typical starting point.
Not every item that reduces your accounting income qualifies as a deduction for NOL purposes. Computing the correct NOL requires adjustments: personal exemptions, capital losses in excess of capital gains, and NOL deductions from other tax years are excluded from the calculation. The IRS Publication 536 worksheet walks through the adjustments step by step.
For most sole proprietors and single-member LLCs, the core question is simple: did your deductible business expenses — wages, rent, insurance, cost of goods, depreciation — exceed your gross revenue for the year? If so, you likely have an NOL worth tracking.
Before TCJA took effect for tax years starting in 2018, businesses could:
TCJA eliminated the carryback for most losses arising after December 31, 2017, extended the carryforward to indefinite (removing the 20-year cutoff), and added a new 80% of taxable income limitation on annual NOL usage.
The OBBBA, signed in 2026, made these TCJA changes permanent. If your business had a loss in 2024, 2025, or 2026, the new rules apply — with no sunset date.
Farming businesses are the primary exception: they retain a 2-year carryback option under current law. Non-life insurance companies also operate under separate carryback rules.
This rule surprises many business owners. Under the current framework, NOL carryforwards can offset at most 80% of your modified taxable income in any given year. You cannot reduce your tax liability to zero using NOL carryforwards alone — at least 20% of taxable income remains on the table.
Concrete example: You generated a $150,000 NOL in 2024 and carried it forward. In 2026, your business earns $200,000 of taxable income. The maximum NOL you can apply is 80% × $200,000 = $160,000. Since your carryforward is only $150,000, you apply the full amount — but you still owe income tax on $50,000. If your carryforward were $250,000 instead, you could only use $160,000 this year, and the remaining $90,000 rolls forward to 2027.
IRS Publication 536 details the adjustments required to compute "modified taxable income" for this calculation. For most small business owners, modified taxable income is essentially regular taxable income computed without the NOL deduction itself.
The practical implication: even businesses with large accumulated losses from prior years should plan for some tax payment in each profitable year. Zero-tax recovery years are largely a pre-2018 concept.
Sole proprietors and single-member LLCs (Schedule C): The NOL calculation happens at the individual level. A Schedule C loss creates or contributes to a personal NOL that carries forward on subsequent Form 1040 filings.
S corporations and partnerships: These are pass-through entities — losses flow to owners via Schedule K-1. Whether an owner can actually deduct that flow-through loss in the current year depends on three additional federal rules that operate before the NOL carryforward framework even applies:
1. Basis limitation (IRC § 1366 for S-corps, IRC § 704(d) for partnerships): owners can only deduct losses up to their tax basis in the entity 2. At-risk rules (IRC § 465): deductions are limited to amounts the taxpayer has "at risk" 3. Passive activity rules (IRC § 469): losses from passive activities can only offset passive income
Losses suspended by these limitations do not create a personal NOL. They wait on the books until the relevant constraint lifts — when additional basis is established, or when the activity is sold or disposed of.
C corporations: The NOL stays at the entity level and carries forward against future corporate taxable income, subject to the same 80% annual limitation.
The calculation lives in IRS Publication 536, starting with the NOL worksheet. For an individual taxpayer (sole proprietor, pass-through owner), the general process:
1. Start with adjusted gross income from Form 1040 (or the provisional figure if computing mid-year) 2. Remove any NOL deductions from other years already included in that figure 3. Subtract non-business deductions exceeding non-business income 4. Exclude capital loss deductions in excess of capital gains 5. Remove net Section 1231 gains that were treated as long-term capital gains
The resulting figure is your NOL for the year if it is negative. Attach the worksheet to your original return; if you discover the NOL after filing, an amended return or Form 1045 can establish the carryforward.
Maintain this documentation — the worksheet, the supporting tax return, and the business books that substantiate the deductions — for as long as the carryforward remains unused. The IRS can question the origin of an NOL in any year you apply it.
In profitable years following a loss year:
IRS Form 1045 (Application for Tentative Refund) remains on the books primarily for farming businesses and a narrow set of pre-2018 losses where carrybacks still apply. For post-2017 non-farming losses, the carryforward tracks directly on the annual return with no separate form required.
When you apply for a business line of credit, term loan, or working capital financing, lenders review 2–3 years of business tax returns. An NOL year inside that window prompts two questions: was the loss structural (declining revenue, unsustainable model) or transactional (one-time expense, heavy equipment depreciation, startup costs)?
As covered in What Underwriters Actually Look for on Tax Returns, underwriters add back non-cash deductions like depreciation and amortization to arrive at a normalized cash flow figure. A business that shows a tax loss primarily due to heavy Section 179 write-offs often looks significantly stronger on the cash basis used in underwriting.
NOL carryforwards showing on your return — reducing current-year taxable income — can actually signal recovery. You're generating taxable income again and applying prior losses appropriately. Lenders read that context when it's documented clearly.
If you took significant losses during a difficult year and are now returning to profitability, the QBI deduction under Section 199A may also reduce your tax burden in profitable pass-through years — the two tools complement each other for self-employed owners rebuilding from a loss period.
If you believe you have an unclaimed NOL or want to confirm your carryforward balance, start with IRS Publication 536 and the worksheet for your entity type. A tax professional familiar with your business structure can confirm the adjusted carryforward amount and ensure it's properly tracked on each year's return.
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*This post is educational and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.*
For most businesses with losses arising after December 31, 2017, the carryback option was eliminated by TCJA — a change made permanent by the OBBBA in 2026. The primary exception is farming businesses, which retain a 2-year carryback option. Non-life insurance companies also have separate carryback provisions under current law.
Indefinitely. TCJA replaced the prior 20-year carryforward limit with no expiration date for NOLs arising after 2017. You track the remaining carryforward balance on your returns each year until the loss is fully absorbed by future income.
Yes. In any year where you have taxable income, NOL carryforwards can offset at most 80% of that income. You will owe income tax on the remaining 20% minimum — even if your total accumulated NOL exceeds your taxable income for that year. The unused portion rolls to the next year.
An S-corp loss flows to shareholders via Schedule K-1 and can reduce personal income. However, S-corp owners can only deduct losses up to their stock basis plus qualified debt basis. Losses exceeding basis are suspended until basis is restored — they do not immediately create a personal NOL carryforward.
Maintain the original tax return, IRS Publication 536 worksheets, and underlying business records from the loss year for as long as the carryforward exists. The IRS can challenge the origin of an NOL deduction in the year you claim it — so loss-year documentation must remain accessible even decades after the original filing.