Net Operating Losses After TCJA: The 80% Rule, Indefinite Carryforward, and IRC 461(l)

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 net operating loss (NOL) occurs when total business deductions exceed total income for the tax year. For sole proprietors, this means Schedule C losses (combined with other income and deductions on Form 1040) produce a negative taxable income. The NOL represents a tax benefit that can offset income in future years, but the rules changed significantly under the Tax Cuts and Jobs Act.

✓Key takeaway

Post-TCJA NOL rules (tax years beginning after 12/31/2020):

Carryforward only: NOLs carry forward indefinitely. The pre-TCJA 2-year carryback was permanently eliminated (except for certain farming losses, which retain a 2-year carryback).
80% limitation: NOLs can offset only 80% of taxable income in the carryforward year. The remaining 20% of income is always taxable, regardless of how large the NOL carryforward is.
Indefinite carryforward: There is no time limit on carrying forward an NOL. A $100,000 NOL from 2024 can offset income in 2025, 2030, 2040, or whenever the taxpayer has taxable income.

Excess business loss limitation (IRC 461(l)): Non-corporate taxpayers (sole proprietors, partners, S-Corp shareholders) face an additional cap. Business losses that exceed $305,000 (single) or $610,000 (MFJ) for 2024 aren’t deductible in the current year. The excess is treated as an NOL carryforward. This limitation was made permanent by the Inflation Reduction Act.

How does the 80% limitation affect small businesses?

Hypothetical example

Round numbers. For current guidance, see IRS net operating loss guidance. A business owner incurs a $200,000 NOL in Year 1 (the business lost $200,000 after all deductions). No other income in Year 1.

In Year 2, the business generates $100,000 in taxable income (before applying the NOL carryforward).

NOL carryforward application:

Taxable income before NOL: $100,000
Maximum NOL deduction: $100,000 x 80% = $80,000
Taxable income after NOL: $100,000 - $80,000 = $20,000
Remaining NOL carryforward to Year 3: $200,000 - $80,000 = $120,000

The business owner pays tax on $20,000 of income in Year 2, even though the NOL carryforward exceeds the total income. The 80% limitation ensures that at least 20% of income is always taxable.

In Year 3, if the business generates $150,000:

Maximum NOL deduction: $150,000 x 80% = $120,000
This exactly equals the remaining NOL carryforward
Taxable income: $150,000 - $120,000 = $30,000
Remaining NOL: $0 (fully absorbed)

Total tax paid over Years 2-3 on $250,000 in income: tax on $50,000 ($20,000 + $30,000) instead of $50,000 ($250,000 - $200,000 NOL). The 80% limitation cost the taxpayer the time value of money on the extra $0 (same result in this case, but with a larger NOL the difference compounds).

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

How does IRC 461(l) interact with NOLs?

The excess business loss limitation applies BEFORE the NOL rules. It caps the net business loss that can offset non-business income (wages, investment income) in the current year.

A business owner with $500,000 in business losses and $100,000 in W-2 income faces the limitation: the maximum allowable business loss is $305,000 (single, 2024). The excess $195,000 ($500,000 - $305,000) is converted into an NOL carryforward, subject to the 80% limitation in future years.

This limitation primarily affects business owners with very large first-year losses from cost segregation studies, real estate development, or businesses that combine heavy equipment purchases (Section 179) with operating losses.

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, which lowers your tax by the amount of the deduction multiplied by your marginal tax rate. A $1,000 deduction in the 24% bracket saves $240 in tax. A tax credit directly reduces your tax liability dollar for dollar. A $1,000 credit saves $1,000 regardless of your tax bracket. Some credits are refundable (you receive the excess even if your tax is zero), while others are non-refundable (they can only reduce your tax to zero). Credits are almost always more valuable than deductions of the same dollar amount.

How do I choose the right tax professional for my business?

Look for a CPA or EA (Enrolled Agent) with specific experience in your industry and business structure. General tax preparers who primarily handle W-2 returns may miss business-specific deductions and planning opportunities. Ask about their experience with your entity type (S-Corp, partnership, sole proprietorship) and whether they handle estimated tax calculations, payroll tax compliance, and state filing requirements. A proactive tax advisor will schedule a mid-year planning session to project your annual liability and recommend adjustments, not just file your return after the year ends. Fee structures vary: hourly rates, flat fees per return, or monthly retainers. For businesses with multiple entities, multi-state obligations, or complex transactions, a monthly retainer with a dedicated advisor often provides the best value.

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Cite this page

Yarik Yarosh, CPA. "Net Operating Losses After TCJA: The 80% Rule, Indefinite Carryforward, and IRC 461(l)." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-nol-carryforward-80-percent-rule

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