Background

Net Operating Loss (NOL) rules let taxpayers move a loss from one year to reduce taxable income in another year. Major changes since the Tax Cuts and Jobs Act (TCJA) and the CARES Act mean the rules vary by tax year: generally, NOLs from tax years beginning after 2020 cannot be carried back, carry forward indefinitely, and are limited to offsetting 80% of taxable income in a year. (See IRS Publication 536 and IRS NOL FAQs.)

How NOLs work now (2025 overview)

  • Which years matter: NOL treatment depends on the year the loss arose. CARES Act relief (2018–2020) temporarily allowed 5-year carrybacks and removed the 80% limit for those years; those special rules do not apply to losses from years beginning after 2020. (IRS Pub. 536)
  • Carrybacks: Generally not allowed for NOLs arising after 2020, except for specific situations (check IRS guidance). Where carrybacks are allowed, taxpayers often use amended returns or a tentative refund application to claim a refund. (IRS NOL FAQs)
  • Carryforwards: NOLs arising after 2020 can be carried forward indefinitely, subject to the 80% taxable income limitation in most cases.
  • Pass-through entities: Partnerships and S corporations do not claim NOLs at the entity level. Losses flow through on K-1s to owners, who report their share on personal returns. Sole proprietors report business losses on Schedule C. For guidance on Schedule C filing, see our Schedule C resources.

Calculating an NOL and filing steps

  1. Reconcile taxable income and allowable deductions for the loss year using IRS worksheets (Publication 536 provides the calculation steps). Keep clear records of adjustments such as nonbusiness deductions and capital loss limits.
  2. Determine whether carryback is available for your loss year. If available and you want a quicker refund, you may file Form 1045 (application for tentative refund) or an amended return; corporations use the corporate counterparts (see IRS forms). If carryback is not allowed, prepare to apply the NOL as a carryforward.
  3. Report the NOL on the correct return in the year(s) you apply it. Individuals typically show the NOL on Form 1040 instructions and schedules; corporations use Form 1120; partnerships and S-corps report flow-through items on Form 1065 or Form 1120S and K-1s.

Practical timeframes (high-level)

  • Losses from 2018–2020: CARES Act allowed a five-year carryback for many NOLs originated in these years and temporarily removed the 80% limit. Taxpayers may still have open carryback claims or refunds to process.
  • Losses from tax years beginning after 2020: Carrybacks generally disallowed; carryforwards are indefinite, but annual use is limited to 80% of taxable income (post-2017 TCJA rules restored the 80% limit for those years).
  • Statute of limitations: Refund claims and amended returns have their own deadlines—typically three years from filing or two years from the tax paid—so act promptly if you think a carryback or amended claim is appropriate.

Who is affected

  • Sole proprietors, partnerships, S corporations, and C corporations can generate NOLs, but how the loss is used depends on entity type. Owners of pass-through entities may use losses on their individual returns subject to basis, at-risk, and passive activity limitations.

Common mistakes and pitfalls

  • Assuming carrybacks are always allowed. Current law generally disallows carrybacks for post-2020 losses—verify the loss year.
  • Forgetting adjustments. NOL calculations require reversing non-deductible items and applying capital loss rules; small missteps change the NOL amount.
  • Missing filing deadlines for refund claims or amended returns.

Professional tips

  • Keep a calculation workbook for every year you have a loss: show how you moved from taxable income to NOL and retain supporting docs.
  • Before filing a carryback or amended return, estimate whether carrying the loss forward will be more valuable in future profitable years (especially with the 80% limit).
  • Work with a CPA or tax advisor for NOLs that cross tax years or involve pass-through entity rules—these issues frequently require professional judgment.

Where to learn more

Related FinHelp articles

Short FAQ

  • Can I carry back an NOL for a business loss in 2024? Generally no if the loss arose in a tax year beginning after 2020. Check the loss year and any special statutory relief.
  • What forms do I use? Forms depend on entity type; individuals often use Form 1040 with Schedule C for sole proprietors, partnerships use Form 1065, and corporations use Form 1120. Use Pub. 536 for the calculation steps.

Disclaimer

This article is educational and not individualized tax advice. Rules change and NOL treatment depends on the year the loss arose and the taxpayer’s facts. Consult a qualified tax professional or CPA before filing. (IRS guidance cited above.)