The NOL Process for Claiming a Tax Deduction

A net operating loss (NOL) occurs when a business or individual has more tax-deductible expenses than taxable income in a single year. This negative taxable income can provide a tax benefit by offsetting income in more profitable years. The rules governing NOLs help taxpayers smooth out their tax liability over time, which is helpful for new businesses or those in cyclical industries.

Calculating Your Net Operating Loss

Noncorporate taxpayers, including individuals, trusts, and estates, must first apply the excess business loss (EBL) limitation. This rule limits the amount of net business losses that can be deducted in a single year. For 2025, the inflation-adjusted threshold is $313,000 for single filers and $626,000 for joint filers. Any business loss that exceeds this limit is disallowed for the current year and is instead treated as an NOL carryforward to the following tax year on Form 461.

After applying any EBL limitations, the official calculation of an NOL for individuals, estates, and trusts is performed on Form 172. Determining an NOL is more complex than simply having a negative taxable income, as the final loss amount must be adjusted by adding back certain deductions that are not allowed when calculating an NOL.

A primary adjustment is adding back any deduction for net capital losses. While you can deduct up to $3,000 in capital losses against other income annually, this deduction is not permitted in the NOL calculation. Another significant adjustment involves nonbusiness deductions, such as the standard deduction or certain itemized deductions, which can only be included to the extent of your nonbusiness income. Any excess of these nonbusiness deductions over nonbusiness income must be added back.

Additionally, the Qualified Business Income (QBI) deduction cannot be used to create or increase an NOL and must be added back. The calculation for a C corporation is more direct, as it does not involve the separation of business and nonbusiness income and deductions.

Rules for Utilizing an NOL

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered these rules for NOLs arising in tax years 2018 and later. The primary change is that these losses can no longer be carried back to prior tax years, with limited exceptions for specific entities like certain farming businesses and insurance companies. Instead, these NOLs must be carried forward to future tax years.

Under the current framework, NOLs can be carried forward indefinitely until the full amount is used. There is no longer a 20-year limit on carryforwards as there was before the TCJA.

A limitation introduced by the TCJA applies to the amount of the deduction you can take in any single future year. For NOLs generated after 2017, the deduction is limited to 80% of your taxable income for that year. This taxable income is calculated before the NOL deduction itself is taken.

The Process for Claiming an NOL

For a carryforward, you will report the NOL deduction on the “Other Income” line of Schedule 1 (Form 1040) as a negative number. It is a requirement to attach a statement to your return that details the calculation of the NOL and tracks the carryforward amounts used each year.

For the limited situations where a carryback is permitted, such as for certain farming losses, there are two methods for claiming a refund. The faster option is to file Form 1045, Application for Tentative Refund, or Form 1139 for corporations. This form must be filed within one year of the end of the NOL year, and the IRS is required to process the application and issue a refund, if approved, within 90 days.

The alternative method is to file an amended tax return for the carryback year using Form 1040-X. This process is slower than using Form 1045, but the deadline is more generous, allowing you to file within three years of the due date of the return for the year the NOL occurred. If you are carrying the loss back to multiple years, a separate Form 1040-X must be filed for each year.