When your business expenses exceed income, you have a net operating loss (NOL). While you need tax liability to realize immediate benefits, NOLs don't disappear—they can be carried forward to future profitable years, potentially saving you thousands of dollars in taxes. Understanding NOL carryforward strategies is essential for maximizing your tax savings over the life of your business.

What Is a Net Operating Loss (NOL)?

A net operating loss occurs when your business deductions exceed your business income. This can happen during:

• The startup phase when expenses exceed revenue
• Years of heavy investment in growth
• Economic downturns affecting your business
• Major expansion or development periods

How NOL Carryforwards Work

Current Rules (Post-2020)

For NOLs arising in tax years beginning after 2020:

• Carryforward Period: Indefinite (no expiration)Carryforward Period:
• Carryback: Generally not allowed (with limited exceptions)Carryback:
• Usage Limit: Can offset up to 80% of taxable income in any yearUsage Limit:
• Order: Must use NOLs in chronological order (oldest first)Order:

Pre-2021 NOLs

For NOLs from tax years beginning before 2021:

• Can be carried back 2 years and forward 20 years
• Can offset 100% of taxable income
• Different rules apply—consult a tax professional

Calculating Your NOL

To calculate your NOL:

• Start with your business income (or loss)
• Add back certain deductions (like NOLs from previous years)
• Subtract nonbusiness deductions
• The result is your NOL for the year

What's Included in NOL Calculation

• Business income and losses
• Business deductions
• Capital gains and losses (limited)
• Certain itemized deductions

What's Excluded

• Personal exemptions
• Standard deduction
• Certain capital loss limitations
• Nonbusiness deductions in excess of nonbusiness income

Real-World Examples

Example 1: Startup Business

Year 1 (2024): Building your businessYear 1 (2024):

• Business Revenue: $15,000
• Business Expenses: $45,000
• NOL: $30,000NOL: $30,000

Year 2 (2025): Business becomes profitableYear 2 (2025):

• Taxable Income: $60,000
• NOL Carryforward Available: $30,000
• Maximum NOL Usage (80% of $60,000): $48,000
• NOL Used: $30,000 (full amount)
• Taxable Income After NOL: $30,000
• Tax Savings: $6,600 (at 22% rate)Tax Savings: $6,600 (at 22% rate)

Example 2: Multiple Year NOL

Year 1: NOL of $20,000Year 1:

Year 2: NOL of $15,000 (total carryforward: $35,000)Year 2:

Year 3: Taxable income of $80,000Year 3:

• Maximum NOL usage (80% of $80,000): $64,000
• NOL Available: $35,000
• NOL Used: $35,000 (all available)
• Taxable Income After NOL: $45,000
• Tax Savings: $7,700 (at 22% rate)Tax Savings: $7,700 (at 22% rate)

Example 3: Large Income Year

Situation: You have $100,000 NOL carryforward and $200,000 taxable incomeSituation:

• Maximum NOL usage (80% of $200,000): $160,000
• NOL Available: $100,000
• NOL Used: $100,000
• Taxable Income After NOL: $100,000
• Tax Savings: $22,000 (at 22% rate)Tax Savings: $22,000 (at 22% rate)
• Remaining NOL: $0 (all used)

Strategic NOL Planning

1. Timing Income and Expenses

• Consider accelerating expenses in loss years
• Defer income to maximize NOLs
• Plan major purchases during unprofitable years
• Coordinate with other tax strategies

2. Maximizing NOL Value

• Use NOLs when you're in higher tax brackets
• Consider business structure for optimal NOL usage
• Plan for the 80% limitation
• Track NOLs carefully to avoid expiration (for pre-2021 NOLs)

3. Business Structure Considerations

• Sole Proprietorship/LLC: NOLs offset personal incomeSole Proprietorship/LLC:
• S-Corporation: NOLs pass through to shareholdersS-Corporation:
• C-Corporation: NOLs stay at corporate levelC-Corporation:
• Each structure has different NOL rules

Special NOL Situations

Farming Losses

• Special rules for farming businesses
• May have different carryback/carryforward rules
• Consult a tax professional familiar with farming

Real Estate Professional Status

• Real estate professionals may have different NOL rules
• Passive activity loss rules may apply
• Complex interaction with NOL calculations

Corporate NOLs

• C-Corporations have separate NOL rules
• Ownership change limitations may apply
• More complex than individual/partnership NOLs

Documentation and Record Keeping

To properly use NOL carryforwards, maintain detailed records:

• Calculate and document NOLs for each year
• Track NOL carryforward balances
• Record NOL usage each year
• Maintain supporting documentation
• Keep records indefinitely (NOLs don't expire)

Common Mistakes to Avoid

• Not calculating NOLs: Many businesses miss this valuable deductionNot calculating NOLs:
• Forgetting the 80% limit: You can't offset all incomeForgetting the 80% limit:
• Poor record keeping: NOLs require careful trackingPoor record keeping:
• Not using NOLs strategically: Timing matters for maximum benefitNot using NOLs strategically:
• Mixing personal and business: NOLs are for business losses onlyMixing personal and business:

Form 1045 and Form 1040-X

For certain situations, you may need to file:

Form 1045 (Quick Refund)

• Used for NOL carryback claims
• Must be filed within 12 months of the loss year
• Faster processing than amended return
• Limited to specific situations

Form 1040-X (Amended Return)

• Used to claim NOL carryback on prior year returns
• Must be filed within 3 years of original return
• Can result in tax refunds

State NOL Rules

State tax rules for NOLs vary significantly:

• Some states don't allow NOL carryforwards
• Different carryforward periods by state
• Different usage limitations
• May require separate state NOL calculations
• Consult a tax professional familiar with your state

Conclusion

Net operating loss carryforwards are powerful tax tools that can save you thousands of dollars over the life of your business. While you need tax liability to realize immediate benefits, NOLs don't disappear—they carry forward indefinitely (for post-2020 losses) to offset future income.

Understanding the 80% limitation, proper calculation methods, and strategic planning can maximize your NOL benefits. America's tax code supports entrepreneurs by allowing businesses to use losses from unprofitable years to reduce taxes in profitable years. With proper documentation, careful tracking, and professional guidance, NOL carryforwards can be one of your most valuable tax-saving assets.