A net operating loss (NOL) occurs when a company’s expenses exceed its revenues. A U.S. corporation can generally carryforward the NOL to future tax years and use it to offset future taxable income. Under some circumstances, the corporation can carryback the NOL to a prior tax year.
The NOL tax rules for U.S. corporations have changed substantially over the years. Historically, the corporation could carry forward an NOL and offset up to 100% of its taxable income if it had a sufficient NOL carryforward. The NOL would expire if unused within 20 years.
The NOL rules changed with the Tax Cuts and Jobs Act (TCJA) of 2017 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
NOL Carryforward Rules
Under the TCJA, a corporate taxpayer can carry forward an NOL to future tax years and use the NOL against up to 80% of taxable income. The TCJA also disallowed carrybacks and lifted the 20-year limit on NOL carryovers.
For example, if a corporation generated a $100,000 NOL in 2021, it can carry the NOL to the 2022 tax year. If, in the 2022 tax year, the corporation’s taxable income is $90,000, it cannot use the full $100,000 NOL to eliminate all of its 2019 taxable income. The corporation can use $72,000 of the $100,000 NOL (i.e., 80% times $90,000 taxable income). After applying the NOL in 2019, the adjusted taxable income is now $18,000 instead of $90,000.
A corporation can file a carryback claim using IRS Form 1045 (Application for Tentative Refund).
NOL Carryback Under the CARES Act
Under the CARES Act, a corporation can carryback NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021. The carryback period is five tax years preceding the taxable year in which the loss occurs.
Additional Information
Taxpayers can find more information on NOLs for individuals in IRS Publication 536 (NOL for Individuals, Estates, and Trusts), while corporations can reference IRS Publication 542 (Corporations).