Fundamentals · Brief · Working level
Net operating losses now: no carryback, indefinite carryforward, and the 80% haircut
Post-2017 net operating losses generally cannot be carried back but carry forward indefinitely, and when used they can offset only 80% of taxable income. The mechanics matter for specialty tax because catch-up deductions create NOLs — and because the 80% limitation guarantees residual taxable income that nonrefundable credits can absorb.
The TCJA rebuilt the net operating loss to trade time for certainty: a post-2017 loss generally cannot be carried back to recover prior-year tax, but it carries forward forever, and when used it can offset only 80% of the year's taxable income. The CARES Act's temporary five-year carryback expired with 2020 losses; since then the rule has been forward-only (farming losses keep a two-year carryback). The statute is Section 172, and the regime's practical fingerprints are all over specialty tax, because the deductions this site covers — bonus depreciation, Section 481(a) catch-ups, the OBBBA's Section 174 catch-up — are exactly the kind that push a profitable year into loss.
The three rules, and the arithmetic of the 80% cap
No carryback means a loss year yields no check from the government — relief the pre-TCJA law provided and the CARES years briefly restored. Indefinite carryforward means the loss waits without expiring, though it waits at the mercy of Section 382 if a corporation's ownership changes: an ownership shift of more than 50 percentage points caps annual NOL use at roughly the equity value times a published rate, which is how acquisitions strand loss carryforwards. The 80% limitation is the sleeper. The NOL deduction for post-2017 losses cannot exceed 80% of taxable income computed before it, so a corporation can never zero out a profitable year with new-vintage NOLs alone.
What the 80% cap leaves on the table — corporation with $5M of carryforwards:
| Pre-NOL taxable income | NOL used | Residual taxable income | Tax at 21% |
|---|---|---|---|
| $500,000 | $400,000 | $100,000 | $21,000 |
| $1,000,000 | $800,000 | $200,000 | $42,000 |
| $3,000,000 | $2,400,000 | $600,000 | $126,000 |
That right-hand column is not a rounding error; it is a permanent feature of the loss company's life until the carryforward runs out.
Where credits meet the haircut
The residual tax the 80% cap creates is the natural habitat of nonrefundable credits. A research credit cannot be used against zero liability — but the cap ensures liability exists in any profitable year, so an NOL company with credits can pair them: NOLs take income down 80%, the credit (within its own Section 38 limitation, which generally cannot offset the last 25% of liability above $25,000) works on the tax that remains, and both attributes stretch further. The general business credit's ordering rules govern the second step. For pre-revenue startups with no liability at all, the payroll tax offset — not the income-tax credit — is the live instrument.
Catch-up deductions and the vintage problem
Specialty-tax deductions arrive in lumps: a look-back cost segregation's 481(a) adjustment, the OBBBA one- or two-year catch-up of 2022–2024 Section 174 balances, 100% bonus on a placed-in-service year. When the lump exceeds current income, the overflow becomes an NOL — post-2017 vintage, forward-only, 80%-limited. That discounts the marginal value of acceleration: the first dollars of a catch-up offset current income at full rates, while the overflow waits in a capped carryforward. Timing the deduction year (choosing the two-year 174 spread over one; electing out of bonus for a class) is often better arithmetic than maximizing year-one deductions. It also interacts with amendment strategy — a small-business retroactive 174A claim that creates losses in 2022–2023 must still climb through those years' rules, and refund claims run against the statute of limitations.
Frequently asked questions
- Can a business still carry back a net operating loss?
- Generally no. For losses arising in tax years beginning after 2020, the TCJA's no-carryback rule applies without the CARES Act's temporary five-year window; a loss can only be carried forward. The exception is a two-year carryback for certain farming losses (and special rules for some insurance companies). A current-year loss therefore produces no refund of prior-year tax — its value is deferred.
- What is the 80% NOL limitation?
- Post-2017 NOL carryforwards can offset at most 80% of a year's taxable income, computed before the NOL deduction. A corporation with $1 million of income and ample post-2017 NOLs still reports $200,000 of taxable income and pays 21% on it — $42,000 — regardless of how large the carryforward is. Pre-2018 NOLs, where any remain, are not subject to the cap but expire on their old 20-year clocks.
- Do NOLs expire under current law?
- Losses arising in tax years beginning after 2017 carry forward indefinitely — they never expire, though corporate ownership changes can throttle their annual use under Section 382. Losses from pre-2018 years kept the old regime: 20-year carryforward with expiration, but no 80% limitation when used.