If you had a business loss in 2025, the federal NOL rules can help you use that loss in future years, but they do not work the way many taxpayers expect. This guide explains who can claim an NOL, how the 80% taxable income limit works for 2025, when carrybacks still exist
Quick takeaways
- For most taxpayers using post-2017 NOLs in tax year 2025, the federal NOL deduction generally cannot offset more than 80% of taxable income in the year you use the loss. Older pre-2018 NOL carryovers follow different rules.
- For losses arising in tax years after 2020, the general federal rule is no carryback. The main exceptions are certain farming losses and losses of insurance companies other than life insurance companies.
- If you are an individual, sole proprietor, partner, S corporation shareholder, estate, or trust, the excess business loss rule can limit your current-year business loss before it becomes an NOL. For 2025, the threshold is $313,000, or $626,000 for married filing jointly.
- Partnerships and S corporations generally do not claim an NOL at the entity level. Their income and loss items pass through to owners, and the owners figure any NOL on their own returns. An LLC’s answer depends on how the LLC is taxed for federal purposes.
Who this applies to
This article is for U.S. taxpayers dealing with a 2025 federal loss year, including:
- individuals with business losses,
- sole proprietors filing Schedule C,
- farmers filing Schedule F,
- rental owners in some cases,
- partners and S corporation shareholders with pass-through losses,
- C corporations with taxable losses,
- estates and trusts.
This article is federal-first. State income tax treatment can differ, sometimes in major ways, and a brief state note appears later.
Introduction
A net operating loss, or NOL, happens when allowed deductions exceed gross income under the tax rules in Internal Revenue Code section 172. In real life, the most common driver is a business loss, but the exact result depends on taxpayer type, the deductions involved, and whether other limits apply before you ever get to the NOL rules.
For tax year 2025 returns filed in 2026, the big federal idea is still the same: an NOL can be valuable, but most taxpayers are now dealing with carryforwards, not carrybacks, and most post-2017 NOLs are subject to the 80% limit when used. This article explains the federal rules, the main exceptions, and the practical planning points. It is educational content, not personal tax advice.
What an NOL is
NOL is a tax loss you may be able to use in another year. The Code defines an NOL as the excess of allowed deductions over gross income, but that calculation is not as simple as looking at negative taxable income on a draft return. Certain items are adjusted or removed when you compute the actual NOL.
For individuals, estates, and trusts, the IRS says an NOL is usually caused by deductions from a trade or business, rental property, or certain casualty and theft losses from federally declared disasters. The IRS also notes that employee-related deductions can be part of the concept in theory, but unreimbursed employee expenses generally are not deductible for most taxpayers for 2018 through 2025, so most employees will not generate an NOL from ordinary job expenses under current rules.
Just as important, some items are not fully allowed in figuring an NOL. For individuals, the IRS instructions say the calculation generally does not allow:
- capital losses above capital gains,
- nonbusiness deductions above nonbusiness income,
- the prior NOL deduction itself,
- the section 199A qualified business income deduction, and
- the section 1202 exclusion for qualified small business stock gain.
That is why a loss year on your draft return and your actual NOL amount may not match.
Who actually gets the NOL
Individuals and sole proprietors
If you run a business as a sole proprietor, your business activity is reported on your own return, and any NOL is figured at the individual level. For 2025, individuals, estates, and trusts use Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, to compute the amount available for carryback or carryforward.
If you are self-employed, your Schedule C or Schedule F loss may be one ingredient in the NOL calculation, but it is not automatically the NOL. Other limits can reduce the deductible loss first.
Partnerships, S corporations, and LLCs
A partnership generally does not use an NOL at the entity level. It passes income, deductions, and losses to partners, and the partner figures the tax effect on the partner’s own return. Likewise, the IRS instructions say partnerships and S corporations generally can’t use an NOL, but owners can use their separate shares of pass-through items to figure an NOL on their own returns.
This is where many beginners get tripped up. A partner or S corporation shareholder must often apply loss limits in this order:
- basis limits,
- at-risk limits,
- passive activity limits,
- excess business loss limits,
- then the NOL rules.
For an LLC, there is no single federal answer. The IRS says a domestic LLC with one owner is generally a disregarded entity unless it elects corporate treatment, while a domestic LLC with two or more members is generally treated as a partnership unless it elects to be taxed as a corporation. So when readers say, “My LLC has an NOL,” the accurate answer is: it depends on the LLC’s federal tax classification.
C corporations
A C corporation claims its own NOL. The corporation reports the deduction on Form 1120, and the 2025 instructions for Form 1120 explain the corporate NOL limitation and carryforward rules. The excess business loss rule is a noncorporate rule, so it does not apply to ordinary C corporation taxpayers the way it applies to individuals, estates, and trusts.
The 2025 federal rule: how the 80% limit works
For tax years beginning after December 31, 2020, section 172 says the NOL deduction is the sum of:
- any pre-2018 NOL carryovers carried to the year, plus
- the lesser of:
- post-2017 NOLs carried to the year, or
- 80% of taxable income, computed without the NOL deduction and without deductions under sections 199A and 250, after taking into account any pre-2018 NOL carryovers.
In plain English, that means most post-2017 NOLs cannot fully wipe out taxable income in a profitable 2025 year. Even if you have a large carryforward, you may still owe federal income tax because the NOL deduction may stop at 80% of the year’s taxable income.
A key detail: the 80% cap applies when you use the NOL, not when the loss is created. So the same 2025 loss may shelter more or less tax later depending on how much taxable income you have in the carryforward year and whether you also have any older pre-2018 carryovers.
Another detail many readers miss: pre-2018 NOLs are still a separate bucket. Under section 172, those older losses are not subject to the 80% limit in the same way, but they generally carry forward only 20 years. By contrast, most NOLs arising in tax years beginning after December 31, 2017 carry forward to each future taxable year.
For corporations, the same general post-2020 80% structure applies, but the IRS instructions also note an exception for insurance companies other than life insurance companies, for which the 80% taxable income limit does not apply.
Carrybacks vs. carryforwards in 2025
General rule: no carryback
For most taxpayers, an NOL arising in 2025 is not carried back. Instead, it is carried forward. The no-carryback rule applies broadly to post-2020 NOLs.
Main exception: farming losses
If you are an individual, estate, trust, or corporation with a qualifying farming loss, the farming-loss portion can generally be carried back 2 years. The Code and IRS instructions define a farming loss as the smaller of:
- the amount that would be the NOL if only farming income and deductions were counted, or
- the total NOL for the year.
If you have an eligible farming-loss carryback, you generally must carry it first to the earliest year in the carryback period unless you make a timely election to waive the carryback. If you waive the carryback, or if part of the loss remains unused, the remainder can be carried forward. For individuals, that election is generally made by attaching a statement to the timely filed return, including extensions. For corporations, the election is generally made on the timely filed corporate return as instructed, and it is generally irrevocable once made.
Insurance company exception
For a corporation that is an insurance company other than a life insurance company, the IRS instructions say the NOL can be carried back 2 years and carried forward 20 years.
The other rule many taxpayers miss: excess business loss comes first
If you are a noncorporate taxpayer, the NOL rules are only part of the story. Section 461(l) can limit how much business loss you may deduct in the current year. The IRS instructions for Form 461 say an excess business loss is the amount by which total business deductions exceed total business income and gains plus a threshold amount. For 2025, that threshold is $313,000, or $626,000 for married taxpayers filing jointly.
The important practical point is this: a disallowed excess business loss is treated as an NOL carryover to a later year. So if you are an individual with a large Schedule C, Schedule F, or pass-through loss, part of what you think is a “2025 NOL” may actually first be limited under Form 461 and then carried forward as an NOL item.
The IRS also gives an ordering rule: first apply the at-risk rules, then the passive activity rules, and then the excess business loss rules. Only after those steps do you know the loss that is available for NOL treatment.
A practical carryforward strategy for 2025 losses
A good NOL strategy is less about “finding a loophole” and more about tracking the right buckets and using them in the right order.
First, separate any pre-2018 NOL carryovers from post-2017 NOL carryovers. They are not interchangeable, and the 80% rule treats them differently.
Second, do not assume a big NOL carryforward means a future profitable year will be tax-free. For most taxpayers, the post-2017 NOL deduction is capped at 80% of taxable income, so you may still have federal taxable income in the carryforward year.
Third, if you have K-1 losses, make sure you are preserving the records that control whether those losses are even deductible: stock or partnership basis, at-risk amounts, and passive activity support. Without those records, the eventual NOL computation is often wrong.
Fourth, if you are a C corporation and there has been a major stock sale, acquisition, or other ownership change, get help. The IRS corporate instructions point to section 382 and related regulations, which can limit the use of NOLs after an ownership change.
Forms, schedules, and filing deadlines
For individuals, estates, and trusts, the current NOL computation form is Form 172. If you carry an NOL forward to a later year, the IRS says to list the NOL deduction as a negative figure on Schedule 1 (Form 1040) for that year, or on Form 1041 for estates and trusts, and attach Form 172 if it applies.
If you have a qualifying carryback, individuals can generally use Form 1045, Application for Tentative Refund, or Form 1040-X. The IRS instructions say Form 1045 generally must be filed within 1 year after the end of the NOL year. For a calendar-year 2025 loss year, that generally means by December 31, 2026.
For C corporations, the NOL deduction is reported on Form 1120, and the 2025 instructions tell corporations to enter NOL carryovers on line 29a and attach a computation statement. A corporation seeking a quick refund from an eligible carryback generally uses Form 1139, which the IRS says must generally be filed within 12 months of the end of the tax year in which the NOL arose.
One practical update: the IRS says Publication 536 will no longer be revised, and the current noncorporate computation resource is Form 172 and its instructions. For 2025 work, that is the better starting point.
State notes: federal and state NOL rules often do not match
This article is federal, but do not assume your state follows the federal NOL rules.
California is a good example. The California Franchise Tax Board says the NOL deduction is suspended for taxable years 2024 through 2026, although taxpayers may still compute and carry over an NOL during the suspension period. California also says the suspension generally does not apply to certain taxpayers below $1 million income thresholds, and the carryover period is extended for suspended years.
New York is another example of nonconformity. The New York Department of Taxation and Finance says, for certain individual filings, the New York NOL deduction is limited to the lesser of the federal NOL deduction derived from New York sources or New York-source AGI without the NOL deduction, and it specifically notes that a taxpayer may have a New York NOL without a corresponding federal NOL.
So if you file in multiple states, or even just one state with partial conformity, your state NOL may need a separate state computation.
Common mistakes and a quick myth-vs-fact check
Myth: My LLC has an NOL. Fact: Maybe, but only after you know how the LLC is taxed federally. A single-member LLC usually flows onto the owner’s return; a multi-member LLC is usually taxed as a partnership unless it elected corporate treatment.
Myth: A big NOL always wipes out all future taxable income. Fact: For most post-2017 NOLs used in 2025, the deduction is capped at 80% of taxable income in the carryforward year.
Mistake: Treating a pass-through loss as immediately deductible. Why it matters: Basis, at-risk, passive activity, and excess business loss rules may all reduce what actually reaches the NOL calculation.
Mistake: Ignoring state differences. Why it matters: California and New York are both reminders that state NOL treatment can depart sharply from the federal result.
What changed for 2025
The core federal NOL framework did not materially change for 2025: the 80% limitation remains, and most post-2020 NOLs still do not carry back.
What did change in the IRS materials is the workflow. For noncorporate taxpayers, Form 172 is now the current computation form, and the IRS says Publication 536 will no longer be revised. Also, the 2025 Form 461 instructions state that Public Law 119-21 permanently extended the disallowance of excess business losses, which matters because that rule often determines how much of a current-year business loss can become an NOL carryforward in the first place.
Bottom line
For tax year 2025, the federal NOL rules are manageable once you separate three questions: who owns the loss, what other loss limits apply first, and how much of the carryforward can actually be used under the 80% rule. Sole proprietors and other individuals often need to think about Form 461 before Form 172. Pass-through owners must deal with basis, at-risk, and passive activity limits first. C corporations follow their own NOL rules and may face additional limits after ownership changes.
If your facts involve a farming carryback, multiple states, a large pass-through loss, or a corporate ownership change, this is a good place to involve a CPA, EA, or tax attorney. The rules are highly fact-dependent, and recordkeeping matters.
What to do next
- Recompute the 2025 loss on the correct federal form. Individuals, estates, and trusts should start with Form 172; corporations should review Form 1120 and, if a carryback exception applies, Form 1139.
- Separate old and new NOL buckets. Keep pre-2018 carryovers separate from post-2017 carryovers so you apply the 80% rule correctly.
- Check whether another loss limit applies first. For noncorporate taxpayers, review basis, at-risk, passive, and excess business loss limits before finalizing the NOL number.
- Review state returns separately. Your federal NOL carryforward may not match your state result, especially in states with separate NOL rules or temporary suspensions.
- Get professional help if elections or deadlines matter. Waiving a farming-loss carryback or filing Form 1045/Form 1139 is time-sensitive, and corporate ownership-change rules can be complex.
Source note
Sources consulted: Internal Revenue Code section 172, IRS Forms 172, 1045, 1120, 1139, and 461 and their instructions, IRS publications and official updates, plus official state tax authority guidance where noted.
