Finance term
Net Operating Loss (NOL)
Also known as: NOL, net operating loss carryforward, tax loss carryforward
Definition
A Net Operating Loss (NOL) occurs when a business's tax-deductible expenses exceed its taxable income in a given year. Under post-TCJA rules (for most businesses), NOLs can be carried forward indefinitely to offset future taxable income — but are limited to 80% of taxable income in any future year. NOL carrybacks were eliminated for most businesses by TCJA.
Detailed explanation
An NOL is not a cash loss — it is a tax attribute. When a business has more deductions than income in a tax year, the resulting NOL can be used to reduce future tax liability. For businesses with lumpy revenue cycles, startup losses, or capital-intensive early years, NOLs are a valuable asset that should be tracked carefully.
Pre-TCJA rules (before 2018): NOLs could be carried back 2 years (generating immediate refunds) and carried forward 20 years, offsetting 100% of future taxable income. The CARES Act temporarily restored carrybacks for tax years 2018–2020 (up to 5 years) — creating significant refund opportunities for businesses with pandemic-year losses.
Post-TCJA rules (2018 forward, except CARES Act exception): (1) No carryback for most businesses. (2) NOL carryforward is indefinite — no 20-year expiration. (3) NOL usage in any future year is limited to 80% of taxable income — businesses with large NOLs cannot eliminate all future taxes until the NOL is fully used. (4) NOLs arising from farming businesses retain a 2-year carryback.
For pass-through entities (LLCs, S-Corps, partnerships, sole proprietorships), the NOL flows through to the owner's personal return and is subject to at-risk and passive activity loss rules in addition to IRC Section 172 rules. Excess business loss limitations under TCJA (Section 461(l)) cap the amount of business losses that non-corporate taxpayers can use against non-business income — excess losses become NOL carryforwards.
NOLs are disclosed on the balance sheet as deferred tax assets. In M&A transactions, NOL carryforwards are valuable — but Section 382 severely limits the annual use of NOLs after an ownership change exceeding 50 percentage points over a 3-year period.
◈ Worked example
- Startup NOL: Software startup Year 1: $800K in wages and overhead, $200K in revenue = $600K NOL. Year 2: $400K profit. NOL carryforward limit = 80% × $400K = $320K offset. Year 2 taxable income after NOL = $80K. Remaining NOL carryforward = $280K.
- Real estate + cost segregation NOL: Commercial real estate investor claims $1.2M in accelerated depreciation from cost segregation study. Net rental income = $400K. Tax NOL = $800K. Carried forward; offsets future rental + business income (subject to passive activity rules and real estate professional classification).
- Section 382 limitation: Private company with $5M of NOL carryforwards raises a new round of venture capital. New investors acquire 60% of the company — triggering Section 382. Annual NOL usage is now limited to: stock value × federal long-term tax-exempt rate (roughly stock value × ~4%). On a $3M post-money valuation, annual NOL use ≈ $120K/year — the $5M of NOLs will take decades to use.
Common questions
The most-asked questions about Net Operating Loss (NOL) — answered straightforwardly.
Can I use an NOL to get a tax refund? +
For most businesses, carrybacks are no longer available under TCJA — you cannot use current-year losses to amend prior-year returns and claim a refund. The CARES Act temporarily allowed 5-year carrybacks for 2018–2020 losses; that window is closed. Farmers retain a 2-year carryback. If you have pandemic-year losses and haven't yet reviewed your 2018–2020 carryback options, consult a CPA — any remaining carryback refund opportunity may still be claimable depending on statute of limitations.
How does an NOL affect my business loan application? +
NOLs can help or hurt loan applications. They reduce taxable income, which is good for tax purposes, but they reduce reported net income on tax returns — the primary income verification document for lenders. Lenders typically analyze 2–3 years of tax returns. Large NOLs from startup losses or capital investments may cause lenders to view the business as unprofitable on paper even if cash flow is strong. Add-backs for non-cash items (depreciation, amortization) and one-time losses are critical to present accurately in a borrower's financial narrative.
Do NOLs expire? +
Post-TCJA NOLs (arising in tax years beginning after December 31, 2017) do not expire — they carry forward indefinitely. Pre-TCJA NOLs that were generated before 2018 and carried forward under old rules retain the 20-year expiration under prior law. If you have NOL carryforwards from before 2018, track their expiration dates carefully — some may still be expiring in coming years.
Further reading
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