Business Losses & NOL Carryforwards

When a business's deductions exceed its income, the excess can become a net operating loss (NOL) — a tax asset that shelters income in other years. A loss year feels like failure; handled correctly, part of it comes back as lower tax on the good years that follow.

THE CURRENT RULES (losses arising in tax years beginning after 2020): the NOL carries forward INDEFINITELY — there is no 20-year expiration anymore. In each future year, the NOL deduction is capped at 80% of that year's taxable income, so an NOL can shrink a tax bill dramatically but generally cannot zero it out in a single year. And there is generally NO carryback: a 2025 loss cannot be carried back to claim a refund of 2023 tax (narrow exceptions exist, such as farming losses).

ORDERING MATTERS: pass-through owners meet an extra gate first — the excess business loss limitation (§461(l)) can defer part of a big loss before the NOL is even computed, and basis and at-risk limits sit in front of that. The sequence — basis, at-risk, excess business loss, then NOL — is preparer work; this playbook teaches the map, not the math.

Common mistakes: believing losses expire after 20 years (that was the old law); believing a loss can be carried back for a refund (generally it cannot, anymore); and discarding the loss-year records — the NOL is only worth what you can document when you finally use it, which may be a decade later.