What Is a Net Operating Loss?

A net operating loss, usually called an NOL, is a tax-law loss that may arise when certain deductions exceed income after required adjustments. An eligible NOL may be carried to another tax year and deducted subject to the rules for the year the loss arose and the year in which it is used.

An NOL is not simply a negative number on a profit-and-loss statement. It is also not automatically equal to a Schedule C loss, partnership loss, S-corporation loss, or negative taxable income. Tax law requires additions, subtractions, limitations, and entity-specific treatment before the available NOL can be determined.

How an NOL is calculated

For an individual, estate, or trust, the calculation generally begins with taxable income and modifies items that are not allowed to create or enlarge the NOL. Form 172 and its instructions address items such as nonbusiness capital losses, the NOL deduction itself, the qualified business income deduction, and certain nonbusiness deductions. Business losses may first be limited by basis, at-risk, passive-activity, and excess-business-loss rules.

A C corporation generally computes and uses an NOL at the corporation level. Partnerships and S corporations generally do not carry the entity's operating loss forward as an entity NOL in the same manner. Instead, eligible loss items usually pass through to partners or shareholders, who apply basis and other limitations and determine the effect on their own returns.

NOL example

Assume a sole proprietor's books show a $90,000 operating loss after a difficult year. The tax return then identifies $25,000 of the loss that is not currently deductible because of an applicable limitation. Other NOL modifications reduce the remaining amount by $5,000.

If the taxpayer carries that post-2017 federal NOL into a later year with $50,000 of taxable income, the general 80% limitation may cap the deduction at $40,000. The unused portion continues forward if otherwise allowed.

Carryforwards and carrybacks

Federal NOLs arising in tax years after 2020 generally carry forward rather than back. A limited two-year carryback remains for the farming-loss portion of certain NOLs. Post-2017 NOLs generally may carry forward indefinitely, but the deduction is generally limited to 80% of taxable income calculated without the NOL deduction.

Older NOLs can follow different expiration, ordering, and percentage rules. Maintain a schedule by loss year rather than combining every carryover into one unsupported number.

Where does an NOL appear?

Individuals, estates, and trusts may use Form 172 to compute an NOL and its carryover. The deduction generally affects the individual return through Schedule 1 and related worksheets or return instructions for the year claimed. C corporations calculate the deduction under the Form 1120 instructions and retain detailed carryover schedules.

A pass-through owner may first see a loss on Schedule K-1, but the K-1 amount is not automatically an NOL. The owner must apply limitations and complete the personal NOL calculation.

Federal and California treatment

California does not simply adopt the federal NOL result. California has its own carryover percentages, periods, entity rules, and forms. For taxable years 2024 through 2026, California suspended the NOL deduction for many taxpayers. The suspension generally does not apply to an individual with net business income or modified adjusted gross income below $1 million, or a corporation with income subject to California tax below $1 million. Other exceptions can apply, including specified disaster losses.

Taxpayers may continue computing and carrying over California NOLs during the suspension period. A federal NOL schedule therefore cannot replace a separate California schedule.

Common mistakes

• Treating a book loss as the final NOL
• Ignoring basis, at-risk, passive-loss, or excess-business-loss limits
• Using a pass-through loss at the entity level instead of analyzing the owner's return
• Assuming all NOLs receive an 80% limit or an unlimited carryforward
• Losing schedules that identify each loss year and remaining balance
• Applying the federal amount directly to California
• Failing to amend carryover schedules after a return adjustment

Frequently asked questions

Related terms

• Net Loss
• Pass-Through Entity
• Schedule C
• Bookkeeping
• Amended Tax Return

Official sources

• IRS — About Form 172, Net Operating Losses
• IRS — Instructions for Form 172
• IRS — Excess business losses
• California FTB — Net operating loss

The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.