How Legislative Changes Impact Carryforward Rules

Background and why legislative changes matter

Tax carryforwards (and occasional carrybacks) are a core part of tax planning. They let taxpayers — individuals and businesses — move unused tax benefits from years when those benefits weren’t fully usable into future years when they can reduce taxable income or tax liability. Because carryforwards affect future tax bills and cash flow, changes in the law can materially alter business decisions, financing, investment timing, and retirement planning.

In my 15+ years advising clients, I’ve seen how a single legislative shift can change multi-year forecasts. The Tax Cuts and Jobs Act (TCJA) of 2017 and the CARES Act of 2020 are two recent examples where Congress altered the mechanics of carryforwards and forced many taxpayers to revisit their tax models and filing choices.

Authoritative context: the IRS explains current NOL carryback and carryforward rules on its Net Operating Loss (NOL) page, and Congress.gov tracks statutory changes to those rules (see IRS and Congress.gov links in the Sources section).

How legislative changes have changed common carryforward types

• Net Operating Losses (NOLs): TCJA (signed December 2017) changed the landscape by generally (for NOLs arising after 2017) allowing NOLs to be carried forward indefinitely but limiting the annual NOL deduction to 80% of taxable income for those years. The CARES Act (March 2020) temporarily allowed NOLs arising in 2018–2020 to be carried back up to five years and suspended the 80% taxable income limit for tax years before 2021. After these temporary CARES Act adjustments expired, the TCJA framework largely resumed. (See IRS NOL guidance.)

• Business tax credits: Carryback and carryforward periods vary by credit. The Internal Revenue Code and IRS rules set different carryforward periods — for example, the general business credit may be carried back one year and carried forward up to 20 years, while other credits are refundable or have different timing rules. Legislative reforms sometimes change limits, eligibility, or the length of carryfowards.

• Capital losses: Individuals generally carry capital losses forward indefinitely until used to offset capital gains and up to $3,000 of ordinary income annually (or $1,500 if married filing separately). Legislative changes can alter offset limits or treatment of certain gains/losses (rare but possible).

• State rules: States do not always follow federal changes. A federal reform that alters carryback/carryforward treatment may not apply to the state return, producing mismatches that require separate state planning.

Practical, step-by-step implications for taxpayers

1. Timing and planning: A law that eliminates carrybacks but permits indefinite carryforwards (as TCJA did) shifts value from immediate refunds to future-year offsets. If a new law restores temporary carrybacks (as CARES did in 2020), filing amended returns or refund claims may be worthwhile.

2. Forecasting taxable income: When carryforward limits (like the 80% rule) apply, taxpayers should model how much of an NOL they can actually use year-by-year and whether delaying or accelerating income or deductions produces a better tax result.

3. Documentation: Maintain detailed carryforward schedules (year of origin, amount, how applied each year). Accurate schedules reduce audit risk and simplify amendments if laws change retroactively.

4. Amending returns and refunds: Retroactive changes may create refund opportunities. Individuals use Form 1040-X to amend personal returns; corporations sometimes use Form 1139 (corporation application for tentative refund) or a claim for refund if a carryback becomes available. FinHelp has guidance on amending returns and NOL carrybacks and carryforwards for corporations and individuals (see internal links below).

Real-world examples

• Example 1 — Small business NOL: A small retail business had a big loss in 2018. Under TCJA, that loss could be carried forward indefinitely but only used to offset 80% of taxable income each year (for NOLs arising after 2017). When CARES temporarily allowed a five-year carryback for 2018 NOLs, the owner could elect a carryback to claim a refund for earlier profitable years — improving cash flow during the pandemic. After the CARES changes expired, the owner reverted to forward planning.

• Example 2 — Unused tax credit: A startup with an R&D credit that it cannot use in Year 1 may be able to carry the credit forward for multiple years. If Congress shortens the carryforward period for certain credits in a later reform, the startup would need to accelerate tax planning to monetize the credit before expiration.

Who is affected and how to check eligibility

Carryforward impacts vary by taxpayer type:

• Small and mid-size businesses: Often rely on NOLs and credit carryforwards for smoothing taxable income.
• Startups and R&D-heavy firms: Frequently have large nonrefundable credits early on and depend on long carryforward windows.
• Individuals with variable income: Capital-loss carryforwards and other personal tax attributes affect future tax returns.
• Taxpayers with multi-state exposure: Differences between federal and state carryforward rules create add-back or adjustment needs on state returns.

To confirm current federal rules, use the IRS pages for the specific carryforward type (for NOLs, credits, or capital losses) and consult a tax adviser for state treatment.

Professional tips and a short checklist

• Review carryforward schedules annually during year-end planning.
• Re-run taxable income projections when a statute changes — don’t assume previous plans still work.
• Keep source-year tax returns, calculation workpapers, and any IRS or state correspondence that documents carryforward amounts.
• If a change is retroactive and creates refund potential, evaluate the cost-benefit of filing amended returns versus carrying benefits forward.
• Coordinate with your CPA on elections: some elections (e.g., electing to waive carrybacks) must be timely made and can’t be changed later without IRS consent.

Informative table (quick reference)

Common mistakes and misconceptions

• Assuming federal and state carryforward rules match. They often don’t.
• Forgetting to file an amended return when a retroactive change creates a refund opportunity.
• Failing to track the origin year and remaining balance of each carryforward item — that creates errors when applying new rules.

When to consider amending returns

If Congress enacts a retroactive change or a temporary carryback window opens, you should evaluate whether to file an amended return. For individuals that is usually Form 1040-X; corporations may use Form 1139 or claim a refund on an amended return. Consult your tax professional before amending: statutes of limitations, timing, and supporting documentation matter. FinHelp’s guide on amending NOL carrybacks and carryforwards offers practical steps and when a tentative refund application may apply (see internal link).

Frequently asked questions (brief answers)

• Can NOLs be carried forward indefinitely? For NOLs arising after 2017, yes — the TCJA generally allowed indefinite carryforwards, subject to the 80% taxable income limit. Temporary statutes (like CARES) can modify that rule for specific years.

• Do carryforward rules change often? Congress changes tax law episodically; major reforms are uncommon but possible. Administrative guidance from the IRS can also clarify or change implementation.

• Should I track carryforwards even if I expect low future income? Yes — future income spikes or legislative reversals can make a previously unused carryforward highly valuable.

Action plan (next steps for taxpayers)

1. Inventory all carryforwards by origin year and amount.
2. Update multi-year tax projections reflecting any new legislative changes.
3. Discuss with your tax advisor whether amending prior returns is beneficial.
4. Maintain strong documentation and a digital copy of carryforward schedules.

Internal further reading (FinHelp)

• For background on using carryforwards strategically: Using Carryforwards Strategically to Reduce Future Tax Bills.

• For specific guidance on NOL amendments and corporate refund claims: Amending a Return for Net Operating Loss Carrybacks and Carryforwards.

• For the core NOL glossary and rules: Net Operating Loss (NOL) Carrybacks and Carryforwards.

Authoritative sources and further reading

• IRS — Net operating loss (NOL) carrybacks and carryforwards: https://www.irs.gov/businesses/small-businesses-self-employed/net-operating-loss-nol-carrybacks-and-carryforwards
• IRS — General Business Credit: https://www.irs.gov/credits-deductions/businesses/general-business-credit
• IRS — Capital Gains and Losses (Topic No. 409): https://www.irs.gov/taxtopics/tc409
• Congress.gov — Legislative text and histories (search TCJA, CARES Act): https://www.congress.gov/
• Tax Policy Center and Tax Foundation — policy analysis for major tax changes and their likely effectiveness.

Professional disclaimer

This article is educational and does not constitute tax advice. Rules change, and the correct application of carryforwards depends on facts specific to your tax situation and the timing of legislative changes. Consult a licensed tax professional or CPA before taking action.