Net Operating Loss (NOL) for Small Businesses: Carryforward Rules and the 80% Limitation

By Yarik Yarosh, CPA ·September 5, 2026 ·4 min read

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

A business loss occurs when deductible expenses exceed revenue for the year. For sole proprietors and S-Corp shareholders, the business loss flows through to the personal return and may offset other income (wages from another job, investment income, a spouse’s income on a joint return). If the business loss exceeds all other income, the excess becomes a net operating loss (NOL) that carries forward to future tax years.

✓Key takeaway

Under the current rules (TCJA as modified by OBBBA): (1) NOLs can only be carried forward (no carryback to prior years, with limited exceptions for farming losses). (2) The NOL deduction in any future year is limited to 80% of taxable income (before the NOL deduction). This means a business can never reduce future taxable income to zero using an NOL carryforward; 20% of income is always taxable. (3) NOLs carry forward indefinitely (no expiration). (4) For sole proprietors and S-Corp shareholders, the excess business loss limitation under IRC 461(l) applies first: business losses exceeding $305,000 single / $610,000 MFJ (2024, indexed) are disallowed in the current year and treated as an NOL carryforward. This limitation was made permanent by the OBBBA.

How does the NOL carryforward work?

Hypothetical example

Round numbers. For current guidance, see IRS net operating loss guidance. A new restaurant opens in 2026 and has a $50,000 loss in its first year (startup costs, build-out depreciation, pre-opening expenses exceed revenue). The owner has no other income.

2026: Business loss: ($50,000). Other income: $0. NOL generated: $50,000. Tax owed: $0. NOL carryforward: $50,000.

2027: Business profit: $80,000. NOL deduction: 80% of $80,000 = $64,000 (but the NOL is only $50,000, so the full $50,000 is used). Taxable income: $80,000 - $50,000 = $30,000.

If the 2026 loss were $100,000 and 2027 profit were $80,000: NOL deduction limited to 80% of $80,000 = $64,000. Taxable income: $80,000 - $64,000 = $16,000. Remaining NOL carryforward to 2028: $100,000 - $64,000 = $36,000.

The 80% limitation means the owner always pays some tax in profitable years, even with an NOL carryforward.

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

What about the excess business loss limitation?

Before the NOL calculation, the excess business loss limitation (IRC 461(l)) caps the amount of business losses that can offset non-business income in any year. Business losses exceeding $305,000 (single) or $610,000 (MFJ) are disallowed and treated as an NOL carryforward.

This primarily affects business owners with large Section 179 deductions or significant startup losses who also have substantial non-business income (a spouse’s wages, investment income). The disallowed excess isn’t lost; it becomes an NOL carryforward subject to the 80% limitation in future years.

Hypothetical example

Round numbers. A sole proprietor purchases $400,000 in equipment (Section 179) for a new construction company. The business has $200,000 in revenue and $400,000 in Section 179 plus $100,000 in other expenses. Business loss: ($300,000). The owner’s spouse earns $150,000 in W-2 wages (MFJ filing).

Excess business loss limitation: business losses are limited to $610,000 (MFJ). The $300,000 loss is under the limit, so the full amount is allowed.

Combined income: $150,000 (spouse wages) - $300,000 (business loss) = ($150,000) net loss. NOL generated: $150,000. Tax owed: $0.

2028: construction company earns $200,000 profit. Spouse earns $150,000. Combined income: $350,000. NOL deduction: 80% of $350,000 = $280,000, but the NOL is only $150,000. Full NOL used. Taxable income: $200,000.

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

What tax records should I keep and for how long?

The IRS generally requires you to keep tax records for 3 years from the date you filed the return or 2 years from the date you paid the tax, whichever is later. Keep records for 6 years if you underreported income by more than 25%, and indefinitely if you did not file a return or filed a fraudulent return. Employment tax records must be kept for at least 4 years. Property records (purchase price, improvements, depreciation) should be kept for as long as you own the asset plus the applicable retention period after disposition. Digital copies are acceptable as long as they are legible and can be reproduced if requested by the IRS.

What are the most important tax deadlines for small business owners?

The federal income tax return deadline depends on your entity type. Sole proprietors (Schedule C) and single-member LLCs file with Form 1040 by April 15. S-Corps (Form 1120-S) and partnerships (Form 1065) file by March 15, which is earlier because they issue K-1s that individual partners need for their personal returns. C-Corps (Form 1120) file by April 15. All deadlines shift to the next business day if they fall on a weekend or holiday. Extensions are available (6 months for most entities, 5 months for partnerships and S-Corps), but an extension to file is not an extension to pay. Estimated taxes are due quarterly on April 15, June 15, September 15, and January 15.

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Cite this page

Yarik Yarosh, CPA. "Net Operating Loss (NOL) for Small Businesses: Carryforward Rules and the 80% Limitation." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-net-operating-loss-nol

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