What is Net Operating Loss (NOL)?

A net operating loss arises when a business's deductions exceed its income for the year, after certain adjustments. For individuals with business losses, an NOL can also result when business losses exceed other income. The IRS explains the rules in Form 1045 page for individuals, estates and trusts, and in the corporate return instructions.

Carryforward rules

For NOLs arising in tax years beginning after 2020, the general rules are:

• No carryback for most taxpayers, with exceptions such as certain farming losses
• Indefinite carryforward
• 80% limit: the NOL deduction in a later year is generally limited to 80% of taxable income, computed without the NOL deduction

Older NOLs may follow different rules.

Pass-through owners

For partnerships and S corporations, losses pass through to owners, who may use them against other income if they have enough basis and meet the at-risk and passive activity rules. If an owner's losses exceed their income, an NOL may arise on the personal return. Excess business loss limitations can also apply to large losses.

Recordkeeping

NOL carryforwards must be tracked year to year, with the year each loss arose and how much has been used. Keep the returns and calculations for every year an NOL is carried. See how long to keep business records.

Not the same as a book loss

A loss on your financial statements may differ from a tax NOL because of book-to-tax differences such as depreciation methods and nondeductible expenses. See net income.

Planning

Expected losses in early years can affect decisions such as entity choice and the timing of section 179 elections. See section 179 expensing and our tax services.

Related terms

• Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.
• Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.

Browse more definitions in the small business glossary.