Net Operating Loss (NOL) Carryforward Rules for CPAs: The Complete 2025 Guide

The Tax Cuts and Jobs Act permanently rewired how net operating losses work. Since 2018, most taxpayers can no longer carry an NOL back to prior years — the two-year carryback was eliminated. What they receive instead is an indefinite carryforward, constrained by a single critical rule: the NOL deduction in any carryforward year is capped at 80% of taxable income before the NOL deduction itself, per IRC §172(a). A business generating $500,000 in taxable income cannot offset more than $400,000 with accumulated NOLs, regardless of how large the carryforward balance is. Understanding these mechanics is essential for CPAs managing clients with cyclical losses, start-up years, or significant Section 179 and bonus depreciation deductions that create paper losses in profitable operating years.

How an NOL Is Calculated

A net operating loss occurs when a taxpayer's allowable deductions exceed gross income for the year. The computation differs meaningfully by entity type.

Individuals (Schedule C filers, pass-through recipients, rental property owners): IRC §172(d) requires modifications before the loss qualifies as an NOL. Items that cannot create or enlarge an individual's NOL include:

• Capital losses in excess of capital gains
• The standard deduction or non-business itemized deductions
• The deduction for personal exemptions (now $0, but still excluded from the NOL formula)
• The Section 199A deduction for qualified business income — QBI is not considered in computing the NOL itself
• Non-business income to the extent it does not offset non-business deductions

These adjustments matter: a Schedule C loss of $90,000 against $30,000 in wages does not automatically produce a $60,000 NOL. The allowable deductions must be traced through the §172(d) modification worksheet to arrive at the true NOL figure.

C Corporations: Corporate NOL calculations are more straightforward — the 80% limitation applies in carryforward years, but the §172(d) individual modifications do not. A C-Corp's NOL is substantially its net loss for the year before the carryforward limitation.

Pass-through entities (S-Corps, partnerships, LLCs): These entities do not pay tax at the entity level and do not generate entity-level NOLs. Losses pass through to owners, who deduct them subject to four sequential limitations: stock and debt basis (IRC §1366(d)), at-risk rules (IRC §465), passive activity loss rules (IRC §469), and — for non-corporate taxpayers with large losses — the excess business loss limitation under IRC §461(l). An S-Corp shareholder whose deductible loss exceeds current basis carries that loss forward as a suspended loss — distinct from an NOL — deductible in a future year when basis is restored. See S-Corp vs LLC: Which Tax Structure Saves More in 2025? for how entity structure determines which loss limitation regime applies.

The 80% Limitation Under TCJA

The most operationally significant NOL rule change from the TCJA is the 80% limitation under IRC §172(a)(2). In any carryforward year, the NOL deduction cannot exceed 80% of taxable income computed without regard to the NOL deduction.

Example: A C-Corp has a $1,000,000 NOL carryforward from 2022. In 2025, it generates $400,000 of taxable income before the NOL. The maximum NOL deduction is $320,000 (80% × $400,000). The remaining $680,000 carryforward rolls to 2026 — with no expiration date.

Planning implication: The 80% cap means clients with large NOL carryforwards always owe some tax in profitable years, even if the carryforward far exceeds current income. For these clients, ensuring other timing strategies — bonus depreciation, deferred revenue recognition, or deductible retirement contributions — are exhausted before relying on the NOL reduces the total tax cost over the carryforward utilization period.

Pre-2018 NOLs are grandfathered: NOLs generated before January 1, 2018 remain subject to the old rules: 20-year carryforward limit, the 2-year carryback option, and no 80% limitation. Clients with both pre-2018 and post-2017 NOLs must track them separately. Pre-2018 NOLs are applied first in a carryforward year and can offset 100% of taxable income. The 20-year limit is live: a 2007 NOL expires in 2027 if unused.

CARES Act Exception (Historical, Relevant for Amended Returns)

The Coronavirus Aid, Relief, and Economic Security Act temporarily suspended the TCJA NOL rules for tax years 2018, 2019, and 2020:

• NOLs from those years could be carried back 5 years (the 2-year carryback was restored temporarily)
• The 80% limitation was suspended — those NOLs could offset 100% of income in carryforward years

The carryback window for most 2020 NOLs closed in 2021. However, if a client filed their original return late or on extension, verify whether a Form 1045 carryback is still within the 3-year amendment window. An unrealized 2020 NOL carryback into a year with a higher marginal rate can still generate a meaningful refund where the statute hasn't expired.

Carryforward Tracking Requirements

The IRS requires taxpayers to maintain records documenting NOL carryforwards by year of origin. Best practices:

1. Maintain a separate NOL schedule attached to each year's return showing: year of origin, original loss amount, amounts used in prior years, and remaining balance. Tax software tracks this internally, but the underlying computation should be documented separately in the permanent file.

2. Distinguish pre-2018 from post-2017 NOLs — they carry different limits, different 80% treatment, and different carryforward periods. Pre-2018 NOLs must be applied before post-2017 NOLs and have a hard expiration date.

3. Document the original loss year computation — if a future IRS examination challenges an NOL carryforward, the burden is on the taxpayer to prove the underlying loss was correctly computed. Missing prior-year returns or incomplete workpapers can result in partial or complete disallowance of the carryforward.

4. For C-Corps undergoing ownership changes: Track when controlling interest shifted, because IRC §382 imposes an annual usage cap after an ownership change exceeding 50% within a 3-year testing period. The §382 limitation calculation requires knowing the pre-change equity value and the applicable IRS long-term tax-exempt rate — both must be documented at the time of the transaction.

IRC §382 Ownership Change Limitations

When a C-Corporation undergoes an ownership change — defined as more than a 50-percentage-point shift in stock ownership during any 3-year testing period — IRC §382 caps the annual NOL deduction at the §382 limitation amount. The limitation equals: (fair market value of the loss corporation's stock immediately before the ownership change) × (the applicable federal long-term tax-exempt rate, published monthly by the IRS under IRC §382(f)).

For CPAs advising on entity structure and capital raise decisions, §382 analysis is required pre-transaction work. A startup with $3,000,000 in accumulated NOLs that sells 60% equity to a venture capital fund may end up with an annual §382 limitation of $40,000 to $80,000, depending on valuation and the applicable rate — effectively stranding most of the NOL carryforward for practical purposes. NOL value should be included in acquisition due diligence and pre-transaction modeling, not discovered post-close.

Year-End NOL Planning Strategies

NOL mechanics create planning opportunities that belong on the year-end checklist alongside the strategies outlined in Year-End Tax Planning for Business Clients.

For clients building an NOL this year:

• Consider accelerating additional deductions — equipment through bonus depreciation, prepaid business expenses under the 12-month rule — to maximize the current-year loss if it will be usable in the carryforward year at a favorable rate
• Confirm business vs. non-business classification of all income and deduction items before closing the books — misclassification affects the §172(d) modification and can reduce the actual NOL amount
• For clients at a rate crossover point, evaluate whether generating a larger NOL now or paying modest current-year tax and carrying forward less is more efficient over the full projection period

For clients with existing NOL carryforwards:

• If the client is in a higher bracket this year than forecast in future years, consider accelerating income recognition to use more NOL at the current rate (still limited to 80% of taxable income per year)
• For individual clients, evaluate Roth conversion opportunities — if a client has a large NOL carryforward, a Roth conversion generating ordinary income can be partially sheltered by the NOL, capturing rate arbitrage while reducing future RMD exposure
• Coordinate with capital gains timing decisions — the NOL deduction reduces taxable income, which can shift clients into lower capital gains rate brackets. Modeling the interaction before year-end can identify whether selling appreciated assets in a high-NOL year produces a 0% or 15% LTCG rate on gains that would otherwise be taxed at 20% plus NIIT

For C-Corp clients specifically:

• An elective tax year that produces an NOL in Q4 can be deferred or accelerated depending on carryback availability and projected future rates — coordinate with the corporate calendar year-end and any planned Q1 distributions
• If the §382 annual limitation is binding, using it fully in each post-change year (rather than allowing unused limitation to accumulate in certain structures) requires active monitoring

Common Mistakes CPAs Make with NOL Carryforwards

Applying the 80% limit to the wrong base. The limitation is 80% of taxable income before the NOL deduction — after all other deductions. Applying it against gross income or pre-deduction income overstates the allowed deduction and produces an incorrect return.

Not tracking pre-2018 NOLs separately. Pre-2018 losses have a 20-year carryforward limit and no 80% cap. A 2010 NOL not used by 2030 expires permanently. Missing this produces a material missed deduction.

Applying C-Corp NOL rules to pass-through owners. Pass-through entity owners do not carry forward entity-level NOLs. They carry forward suspended losses governed by basis, at-risk, and passive activity rules — separate calculations with separate limitations.

Ignoring §382 in M&A transactions. Practitioners sometimes surface the accumulated NOL as a tax asset in an acquisition target only to discover post-close that the annual usage is so limited that the NOL has near-zero net present value. Run the §382 limitation analysis before the deal closes, every time.

Failing to apply available NOL carryforwards. NOL deductions do not apply automatically — they must be claimed on the return (Schedule 1, Line 8a for individuals; Form 1120 for C-Corps). Some practitioners forget to apply the carryforward in profitable years, resulting in overpayment.

Frequently Asked Questions

Can an individual carry an NOL back to prior years?

Generally, no. The TCJA eliminated the carryback for most taxpayers for losses arising in tax years beginning after December 31, 2017. Two exceptions remain: (1) farming losses retain a 2-year carryback under IRC §172(b)(1)(B), and (2) the CARES Act temporarily allowed 5-year carrybacks for 2018–2020 losses, but that window has closed for most calendar-year filers.

Does a post-2017 NOL carryforward ever expire?

No. Post-2017 NOLs carry forward indefinitely — there is no 20-year limit. Pre-2018 NOLs (generated before January 1, 2018) are subject to the old 20-year carryforward limit and will expire. A 2008 NOL, for example, expires at the end of tax year 2028 if unused.

How does the 80% limitation interact with the alternative minimum tax?

For individual AMT purposes, the AMT NOL is computed separately and is also subject to an 80% limitation under IRC §56(a). The AMT NOL may differ from the regular tax NOL because of AMT preference items — primarily differences in depreciation (accelerated regular vs. ADS for AMT). Clients who have taken significant bonus depreciation in prior years may have regular tax NOLs that are larger than their AMT NOLs.

Can an S-Corp have a net operating loss?

An S-Corp itself does not generate federal NOLs. Losses flow to shareholders through Schedule K-1 and are deductible at the shareholder level subject to basis, at-risk, and passive activity limitations. An S-Corp that was previously a C-Corp may have pre-conversion C-Corp NOLs stranded at the corporate level — those losses are subject to the built-in gains rules and cannot be used against the S-Corp's ordinary pass-through income.

How do I report an NOL carryforward for an individual client?

The current-year NOL (generating a new loss) is computed on Form 1045, Schedule A. The NOL deduction in a carryforward year is reported on Schedule 1, Line 8a as a negative number. Carryforward balances and year-of-origin should be maintained in the client's permanent tax file and reconciled annually when the return is prepared.

How does canceled debt in bankruptcy affect an NOL carryforward?

Debt discharged in bankruptcy excludes cancellation of debt income from gross income under IRC §108, but simultaneously reduces tax attributes in a prescribed order: NOL carryforwards first, then general business credits, capital loss carryforwards, basis in property, and passive activity loss carryforwards. Attribute reduction occurs in the tax year following the discharge. CPAs advising clients emerging from bankruptcy must compute the full attribute reduction schedule before calculating usable NOL in the first post-discharge year.

What should I advise a C-Corp client considering an equity raise that would trigger a §382 ownership change?

Run the §382 limitation analysis before the transaction closes. Calculate: (pre-change loss company equity value) × (current IRS long-term tax-exempt rate). If the resulting annual limitation is small relative to the NOL balance, the NOL's net present value may be near zero and should not influence valuation or deal terms. Some transactions structure the raise to stay below the 50-percentage-point ownership shift threshold, or use net value elections under Reg. §1.382-7, but these require planning before the change occurs — not after.

Does a foreign NOL affect a U.S. C-Corp's domestic NOL calculation?

Foreign NOLs of a U.S. corporation are generally incorporated into the domestic NOL calculation — the corporation computes a single consolidated taxable income figure. However, foreign tax credit carryforwards, Subpart F inclusions, and GILTI adjustments can create separate basket complications. Multinational clients with cross-border operations should have their NOL schedules reviewed alongside their foreign tax credit analysis to confirm consistency.

Arvori helps tax practices track client NOL carryforwards, flag §382 ownership change risks, and identify year-end optimization opportunities without manual spreadsheet maintenance. Learn how Arvori's workflow automation works for CPA firms at arvori.app.