How to Deduct Business Losses and Net Operating Losses

Businesses don't always earn a profit. If your losses exceed your income from all sources for the year, you have a "net operating loss" (NOL). NOLs are particularly likely to occur when businesses are first starting out or when economic conditions are bad. The COVID-19 pandemic resulted in many NOLs. In response, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which Congress enacted in 2020, loosened the strict rules for claiming NOLs that the Tax Cuts and Jobs Act (TCJA) imposed.

So, three separate sets of rules apply to deducting NOLs, depending on when they occur. If your business lost money during 2018 through 2020, your loss could provide you with a refund of all or part of previous years' taxes in as little as 90 days—a quick infusion of cash that should be very helpful. If you failed to take advantage of an NOL for a past year, it might not be too late to do so. You can file an amended return to claim an NOL up to three years after the end of the tax year involved.

What Is an NOL?

If your business deductions exceed your business income, you have a tax loss for the year. If, like most home business owners, you're a sole proprietor, you may deduct any loss your business incurs from your other income for the year—for example, income from a job, investment income, or your spouse's income (if you file a joint return). If your business is operated as an LLC, S corporation, or partnership, your share of the business's losses is passed through the business to your individual return and deducted from your other personal income in the same way as a sole proprietor. However, if you operate your business through a
C corporation, you can't deduct a business loss on your personal return. It belongs to your corporation.

After deducting your tax loss from other income, any remaining loss is a "net operating loss" (again, a "NOL").

NOLs for 2017 and Earlier

For NOLs occurring during 2017 and earlier, business owners could "carry a loss back"—that is, they could apply an NOL to past tax years by filing an application for refund or amended return. This option enabled them to get a refund for all or part of the taxes they paid in past years. NOLs could generally be carried back two years, and then carried forward 20 years. Moreover, NOLs could reduce taxable income to zero in the carryback or carry-forward years. You also had the option to elect to only carry an NOL forward to future years.

NOLs for 2018 Through 2020

The TCJA radically changed NOL deductions starting in 2018, eliminating all carrybacks of NOLs. Instead, taxpayers were only allowed to deduct them in any number of future years. Moreover, an NOL could only offset up to 80% of taxable income (before the pass-through deduction) for any year.

Due to the economic devastation the COVID-19 pandemic caused, Congress amended the NOL rules for 2018 through 2020 to make it easier to deduct NOLs. For these years, an NOL may be carried back five years and then carried forward indefinitely until it is used up. Ordinarily, you must carry an NOL back to the earliest year within the carryback period in which there is taxable income, then to the next earliest year, and so on. Also, NOLs for these years may offset 100% of taxable income to reduce the tax liability to zero.

You didn't have to carry back an NOL for 2018 through 2020 for five years if you didn't want to. You could elect to apply the NOL only to future years by attaching a statement to your tax return for the year. For 2018 and 2019 NOLs, you had to make this election on your 2020 tax return.

NOLs for 2021 and Later

For 2021 and later years, you may only deduct NOLs for the current year and any number of future years. You may not carry them back to deduct in past years. In addition, NOLs for these years may only offset up to 80% of taxable income (before the pass-through deduction) for any year.

Annual Dollar Limit on NOL Deduction

The TCJA limited deductions of "excess business losses" by individual business owners during 2018 through 2025. Married taxpayers filing jointly could deduct no more than $519,000 per year in total business losses. Individual taxpayers could deduct no more than $259,000. Unused losses had to be deducted in any number of future years as part of the taxpayer's NOL carry-forward. Congress eliminated this dollar limitation for losses incurred during 2018 through 2020. So, taxpayers with very large losses for any of these years could deduct them in full. The excess business loss limit returned for 2021 and was made permanent by the One Big Beautiful Bill Act in 2025. It's adjusted for inflation each year. For 2025, NOLs are limited to $313,000 for individual taxpayers and $626,000 for married taxpayers filing jointly. Losses over these amounts must be carried forward and deducted in future years.

Claiming an NOL Refund

You can only take advantage of an NOL after you've completed and filed your tax return for the year involved. The return will show the amount of the NOL.

You can claim a refund for prior years' taxes due to an NOL in two ways. The quickest way is to file IRS Form 1045, Application for Tentative Refund. If you file Form 1045, the IRS is required to send your refund within 90 days. Additionally, the IRS makes only a limited examination of the claim for omissions and computational errors. Ordinarily, you must file Form 1045 within one year after the end of the year in which the NOL arose.

The other way to deduct an NOL is to amend your tax return for the year involved by filing IRS Form 1040-X, Amended U.S. Individual Income Tax Return. You have three years after the end of the tax year to file Form 1040-X.

Learn More About NOLs

To get more information about NOLs, refer to IRS Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.