A net operating loss (NOL) occurs when a business's allowable deductions exceed its gross income for the year. Rather than a dead end, an NOL is a tax asset under IRC Section 172 that can offset future taxable income. The rules depend heavily on when the loss arose.
What Causes a Net Operating Loss?
An NOL arises when deductions exceed gross income. Common triggers include a first-year startup, a severe revenue disruption, large one-time write-offs through bonus depreciation or Section 179, and casualty losses. For individual business owners filing Schedule C, E, or F, losses flow through to personal returns after the excess business loss (EBL) limit under IRC Section 461(l) applies first.
The 80% Limit on Post-2017 NOLs
For losses arising in tax years beginning after December 31, 2017, TCJA changed the rules permanently:
- Carryforward: Indefinite. No expiration date.
- Carryback: Eliminated for most taxpayers. Farming losses retain a 2-year carryback under IRC 172(b)(1)(B).
- Annual deduction cap: The NOL deduction cannot exceed 80% of taxable income computed before the NOL, the Section 199A QBI deduction, and the Section 250 deduction.
Example: A business has $500,000 of taxable income in 2026 and $800,000 of post-2017 NOL carryforward. The 80% cap is $400,000 (80% of $500,000). After deducting $400,000, the company pays tax on $100,000. The remaining $400,000 NOL carries forward indefinitely.
Pre-2018 NOLs Play by Different Rules
NOLs from tax years that began before January 1, 2018 follow pre-TCJA rules:
- Carryback: 2 years (or waived in favor of a full carryforward election)
- Carryforward: 20 years
- Deduction cap: None. They can reduce taxable income to zero.
When both types exist, pre-2018 NOLs are applied first. Only after they are fully consumed does the 80% cap apply to post-2017 carryforwards. This ordering advantage makes pre-2018 NOLs more valuable in profit years.
Section 382: Ownership Change Limits
If a corporation undergoes an ownership change, IRC Section 382 caps how much pre-change NOL can be used per year. An ownership change occurs when shareholders holding 5% or more collectively increase their ownership by more than 50 percentage points over a rolling 3-year testing period.
The annual Section 382 limitation equals the company's fair market value immediately before the change multiplied by the IRS long-term tax-exempt rate (published monthly). For example: $10 million FMV at a 1.64% rate equals $164,000 of pre-change NOL usable per year. Unused annual amounts accumulate, but pre-2018 NOLs still expire after 20 years if no income is available to absorb them.
Section 382 is a critical due-diligence item in any merger, acquisition, or recapitalization.
Excess Business Loss and the OBBBA
Individual business owners hit the EBL limit before an NOL even forms. For 2026, excess losses above approximately $313,000 (single) or $626,000 (MFJ) are disallowed for the current year. The OBBBA, signed July 4, 2025, made the EBL limitation permanent and added a stacking rule: prior-year disallowed EBL amounts must clear the threshold again in the following year before they can be used, which delays relief. Amounts that ultimately clear the EBL filter become NOL carryforwards subject to the post-2017 80% cap.
Key Planning Strategies
Track by vintage. Maintain separate schedules for pre-2018 and post-2017 NOLs. They follow different rules and should never be combined into a single figure.
Model farming carrybacks. Qualifying farming businesses can still carry back 2 years for an immediate refund. Use Form 1139 for corporations and Form 1045 for individuals and partnerships.
Run Section 382 before any deal. Calculate the annual limitation before any ownership transfer closes. A capped NOL significantly changes the economics of a transaction.
Coordinate with bonus depreciation. Restored 100% bonus depreciation in 2026 may create or enlarge NOLs. Planning the timing and use of that carryforward proactively can reduce future tax bills for years.
Have questions about your NOL carryforward strategy or a pending transaction with Section 382 exposure? Contact TS CPA for a free consultation. We respond within the same day.