Tax
Net Operating Loss (NOL)
A tax-deductible loss carried forward from a year when your business's deductions exceeded its income, usable to offset taxable income in future years.
When your business has a loss year, that loss is not wasted. It becomes a Net Operating Loss (NOL) that you carry forward and use to reduce taxable income in profitable years. On the personal return, an NOL from a Schedule C business or a pass-through entity works the same way at the owner level.
The Tax Cuts and Jobs Act reshaped the rules for losses generated after 2017. NOLs now carry forward indefinitely (no more expiration), but they can only offset up to 80% of taxable income in any future year. The old two-year carryback is gone (with limited exceptions for farming and insurance).
For a small business, tracking the NOL balance year-over-year is the difference between paying tax on a rebound year and legally sheltering that income. The NOL lives with the entity that generated it; if you sell the business as an asset sale, the NOL stays behind.
Common pitfalls
- Losing track of the NOL balance across CPA transitions; reconstructing years later requires the original returns
- Forgetting that most states have their own NOL rules that do not mirror federal; a federal NOL is not automatically a state NOL
- Missing the 80% limitation and over-projecting how much current-year tax the NOL will wipe out
- Selling the business as an asset sale and expecting the buyer to inherit the NOL; they will not, and a stock sale is required to move it
Related service
See tax and CPA servicesHave a Net Operating Loss (NOL) situation in your business?
Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.