Net Operating Loss (NOL) Rules: Carryforward, 80% Limitation, and Tax Planning

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

A net operating loss (NOL) occurs when allowable tax deductions exceed gross income for the year. Under IRC 172, NOLs can be carried forward to offset income in future years. The TCJA made two significant changes to NOL rules: (1) NOLs arising in tax years beginning after December 31, 2017 can only offset 80% of taxable income in the carryforward year (the 80% limitation), and (2) NOL carrybacks were eliminated (with limited exceptions for farming losses). These changes mean a business with a $50,000 NOL carryforward and $60,000 of taxable income in the following year can only use $48,000 of the NOL (80% of $60,000), leaving $2,000 to carry forward further.

✓Key takeaway

Current NOL rules (post-TCJA):

Rule	Post-TCJA (Current Law)
Carryback	Not allowed (except farming: 2-year carryback)
Carryforward	Indefinite (no expiration)
Limitation	Can only offset 80% of taxable income
Remaining 20%	Always taxable (cannot be offset by NOL)

How the 80% limitation works:

The NOL used is the LESSER of (a) the NOL available or (b) 80% of taxable income.

Year	Income	NOL Available	80% Limit	NOL Used	Taxable After NOL	NOL Remaining
1	($40,000)	$0	N/A	N/A	($40,000) NOL	$40,000
2	$60,000	$40,000	$48,000	$40,000	$20,000	$0

The full $40,000 NOL is used because it’s less than the 80% limit ($48,000). The 80% cap only binds when the NOL exceeds 80% of income.

When the 80% limit binds (larger NOL):

Year	Income	NOL Available	80% Limit	NOL Used	Taxable After NOL	NOL Remaining
1	($100,000)	$0	N/A	N/A	($100,000) NOL	$100,000
2	$80,000	$100,000	$64,000	$64,000	$16,000	$36,000
3	$90,000	$36,000	$72,000	$36,000	$54,000	$0

In Year 2, only $64,000 of the $100,000 NOL is used (80% of $80,000 income). The remaining $36,000 carries to Year 3.

Common NOL sources for small businesses:

Large Section 179/bonus depreciation deductions in Year 1 (equipment purchase)
Startup losses (expenses exceed revenue in early months)
Bad year (lost a major client, weather/disaster impact)
Expansion costs (new location, hiring, marketing spend)

Section 179 vs. bonus depreciation (NOL creation):

Section 179: CANNOT create or increase an NOL (limited to taxable income from the business)
Bonus depreciation: CAN create an NOL (no taxable income limitation)
If equipment deductions would create a loss: use bonus depreciation (not Section 179) for the loss-creating portion

How do NOLs work in practice for small businesses?

Hypothetical example

Round numbers. A landscaping contractor. Sole proprietor. Starting a new business.

Year 1 (startup): Revenue: $45,000 (partial year, April through December) Operating expenses: $28,000 Equipment purchased: $65,000 (truck $40,000 + mower $15,000 + trailer $10,000)

Section 179 election: $45,000 - $28,000 = $17,000 (limited to net business income) Remaining equipment cost: $65,000 - $17,000 = $48,000 Bonus depreciation on remainder: $48,000 (100% permanent under OBBBA)

Schedule C:

Item	Amount
Revenue	$45,000
Operating expenses	($28,000)
Section 179	($17,000)
Bonus depreciation	($48,000)
Net loss	($48,000)

The $48,000 loss becomes an NOL (created by bonus depreciation, not Section 179).

SE tax: $0 (no net self-employment income) Income tax: $0 (NOL offsets other income up to the NOL amount)

If the landscaper had W-2 income from a day job: $35,000 NOL applied to W-2 income: limited to what’s needed to reduce taxable income to $0 Standard deduction: $15,000 Taxable income before NOL: $35,000 - $15,000 = $20,000 NOL used: $20,000 (reduces taxable income to $0) NOL remaining: $48,000 - $20,000 = $28,000 carried forward

If no W-2 income: NOL of $48,000 carries forward in full.

Year 2 (first full year): Revenue: $110,000 Operating expenses: $55,000 Depreciation: $0 (equipment fully depreciated in Year 1) Net profit: $55,000

NOL carryforward: $28,000 (from Year 1, after W-2 offset) 80% limit: $55,000 x 80% = $44,000 NOL used: $28,000 (less than the $44,000 limit, so fully used)

Taxable income after NOL: $55,000 - $28,000 = $27,000 SE tax: $55,000 x 92.35% x 15.3% = $7,770 (NOL does NOT reduce SE tax) Income tax: $27,000 - $7,770/2 - $15,000 = $8,615 x rates = approximately $1,000

Important: NOLs do NOT reduce self-employment tax. The NOL deduction is an “above-the-line” deduction that reduces AGI and taxable income, but self-employment tax is calculated on Schedule SE independently of the NOL deduction. A landscaper with a $28,000 NOL carryforward and $55,000 in current-year net profit still pays SE tax on the full $55,000.

Year 3 (growing): Net profit: $75,000 NOL remaining: $0 (fully used in Year 2) Full tax applies: SE + income tax = approximately $16,000

Planning considerations:

Use bonus depreciation (not Section 179) to CREATE the NOL. Section 179 cannot create a loss.
If the owner has W-2 income from a spouse or part-time job, the NOL offsets that income first (reducing total family tax).
The NOL carryforward has no expiration under current law (indefinite carryforward).
The 80% limitation means a large NOL takes multiple years to fully absorb if current income is modest.
Track the NOL carefully: it does not appear automatically on next year’s return. The taxpayer (or CPA) must compute and apply it.

NOL from a bad year (not startup): An established plumbing contractor. Year 5. A major customer goes bankrupt, owing $30,000.

Revenue: $80,000 (normally $120,000) Expenses: $70,000 (fixed costs don’t change) New equipment (bonus depreciation): $25,000 Net loss: $80,000 - $70,000 - $25,000 = ($15,000) NOL

Year 6: back to normal, $120,000 revenue, $70,000 expenses, $50,000 net profit NOL applied: $15,000 (less than 80% of $50,000 = $40,000, so fully used) Taxable income: $50,000 - $15,000 = $35,000

The NOL from the bad year offsets income in the recovery year, smoothing the tax impact.

Excess business loss limitation (IRC 461(l)): For non-corporate taxpayers, business losses are limited to $305,000 (single, 2025) or $610,000 (MFJ) per year. Losses exceeding this threshold are carried forward as part of the NOL. This limitation rarely affects small businesses (few sole proprietors have losses exceeding $305,000), but it can affect partnerships, S-Corp owners, or real estate investors with large depreciation deductions.

Illustrative numbers only, not a real client and not advice for your facts.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and answers in writing, three to four business days after you finish the questions. $250 for cross-border, $195 for a second opinion on a filed return, and it comes straight off the bill if we do the work after. Or book a free 15-minute fit call first.

Start a Diagnostic →Book a free call

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Net Operating Loss (NOL) Rules: Carryforward, 80% Limitation, and Tax Planning." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-net-operating-loss-carryforward-deduction

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.