IRS Form 172 Guide: Net Operating Losses (NOL) Filing Steps

1. Introduction – What is Form 172?

IRS Form 172, officially titled Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, is a federal tax form administered by the Internal Revenue Service (IRS). It is used by noncorporate taxpayers to calculate, track, and apply Net Operating Losses.

A Net Operating Loss occurs when a taxpayer’s allowable tax deductions for a given tax year exceed their total gross income. This usually happens when a business operates at a loss, or when a taxpayer suffers significant disaster losses or rental property losses.

Form 172 provides a standardized mechanism for taxpayers to calculate their exact NOL and determine how much loss can be carried forward to offset taxable income in future tax years.

2. Purpose of the Form

The primary purpose of Form 172 is to separate business-related losses from personal nonbusiness items to figure the true allowable Net Operating Loss. Under federal tax law, not all personal losses or standard deductions can be used to create a tax loss that offsets future income.

Form 172 solves the problem of mathematical complexity in tracking multi-year business losses. Because tax laws prohibit personal expense deductions from artificially creating a carryforward loss, Form 172 adjusts your negative taxable income to isolate genuine business operating losses.

Additionally, the form helps taxpayers enforce statutory limits on loss usage—such as the rule that limits NOL carryforward deductions to 80% of taxable income in post-2017 tax years. It ensures accurate recordkeeping across multiple tax filings.

3. Who Needs to File This Form

Form 172 is filed by noncorporate taxpayers who experience a net operating loss in a tax year, or who are applying an NOL carryforward deduction from a prior year. The form applies to several common taxpayer categories:

• Sole Proprietors and Freelancers: Business owners reporting business losses on Schedule C (Form 1040).
• Partners and S Corporation Shareholders: Individuals who receive pass-through business losses from partnerships or S corporations on Schedule E.
• Farmers and Landowners: Agriculture operators reporting farm losses on Schedule F or rental real estate operators.
• Disaster Loss Victims: Taxpayers who suffered casualty or theft losses resulting from a federally declared disaster.
• Estates and Trusts: Fiduciaries filing Form 1041 that incur operating losses during trust or estate administration.

4. Who Is Exempt / Not Required to File

Form 172 is specifically designed for noncorporate taxpayers. Certain taxpayers and business entities do not file this form:

• Corporations: C corporations calculate and deduct Net Operating Losses directly on Form 1120 using dedicated corporate worksheets rather than Form 172.
• Partnerships and S Corporations (as Entities): Pass-through business entities do not use NOLs at the entity level. Losses pass through to individual partners or shareholders, who then file Form 172 on their individual tax returns if applicable.
• Taxpayers Without Business Losses: Individuals whose income exceeds their deductions, or whose negative income is caused purely by personal nonbusiness expenses (like standard deductions or personal mortgage interest), cannot generate an NOL and do not file Form 172.

5. When to File

Form 172 is an annual tax attachment filed alongside your main federal income tax return. Submission timing depends on how you are handling your operating loss:

• NOL Creation Year: File Form 172 as an attachment to your annual tax return (Form 1040, 1040-SR, 1040-NR, or 1041) for the tax year in which the net operating loss occurred.
• NOL Carryforward Year: Attach Form 172 in subsequent tax years when claiming an NOL carryforward deduction to offset taxable income.
• Farming Loss Carryback: If you incur a qualifying farming loss and elect to carry back the loss up to 2 years, attach Form 172 to your amended return or tentative refund application.

6. Where and How to File

Form 172 is filed directly as a supporting schedule attached to your federal income tax return. You do not mail it as a separate standalone filing.

If you e-file your tax return, your tax software will attach Form 172 electronically to your digital Form 1040 or Form 1041 submission. Ensure your software supports Form 172 calculation before e-filing.

If you file a paper return, attach Form 172 behind your primary return and mail it to the designated IRS address as per instructions for Form 1040 or Form 1041. Keep a copy of Form 172 in your permanent records to document loss carryforwards for future tax years.

7. Step-by-Step Instructions to Fill the Form

Form 172 is divided into two primary parts: Part I computes the allowable Net Operating Loss for the current year, and Part II tracks NOL carryovers to future tax years. Follow this line-by-line summary guide:

Form Part	Section Title	Key Steps and Calculations
Part I	Computation of NOL	Start with negative taxable income, adjust for nonbusiness deductions, nonbusiness capital losses, and isolate the true allowable business loss.
Part II	NOL Carryover & Application	Track prior year carryforwards, calculate the 80% taxable income limitation, and determine the net deduction allowed in the current tax year.

Part I – Computation of Current Year NOL

In Part I, you begin with your taxable income from Form 1040 or Form 1041 (which will be a negative number). The form then guides you through adding back non-allowable items that cannot be used to form a net operating loss.

• Nonbusiness Deductions: Add back personal itemized deductions or standard deductions that exceed nonbusiness income (such as dividends, interest, or nonbusiness capital gains).
• Capital Losses: Adjust for capital loss limitations, ensuring nonbusiness capital losses do not exceed nonbusiness capital gains.
• Final NOL Calculation: Combine your negative taxable income with these mandatory statutory add-backs. The resulting figure is your official Net Operating Loss for the year.

Part II – NOL Carryover and 80% Limitation

In Part II, you calculate how much of an existing NOL carryforward you can deduct against current taxable income. Under current tax rules, an NOL carryforward deduction for losses arising after 2017 is generally limited to 80% of current-year taxable income (calculated before the NOL deduction).

Enter your current taxable income, compute 80% of that figure, and compare it to your total available NOL carryforwards. The lesser amount is your allowed NOL deduction for Schedule 1 (Form 1040) or Form 1041, and any remaining balance carries forward to the following tax year.

8. Required Documents/Information Needed Before Filling

Before filling out Form 172, gather all financial statements and prior tax returns related to your business operations and losses.

Ensure you have the following documents ready:

• Draft Form 1040 or Form 1041: Your main income tax return showing initial income, itemized or standard deductions, and negative taxable income.
• Business Schedules: Completed Schedule C (business profit/loss), Schedule E (supplemental income/loss), or Schedule F (farm loss).
• Disaster Loss Records: Form 4684 details if your loss stems from a federally declared disaster.
• Prior Year Form 172 Records: Copies of previous Form 172 filings or carryforward tracking worksheets showing unused loss balances.

9. Common Mistakes to Avoid

Net operating loss calculations are subject to strict IRS scrutiny. Avoid these common errors when completing Form 172:

• Using Personal Expenses to Create NOLs: Including personal standard deductions, personal exemptions, or nonbusiness losses to generate a carryforward loss.
• Attempting Unauthorized Carrybacks: Attempting to carry back general post-2020 business losses to previous tax years. Current law generally requires post-2020 NOLs to be carried forward indefinitely, with exceptions for certain farming losses.
• Ignoring the 80% Taxable Income Cap: Claiming a 100% deduction for post-2017 NOL carryforwards instead of capping the deduction at 80% of current-year taxable income.
• Failing to Keep Multi-Year Records: Not keeping Form 172 in permanent records. You must track NOL balances across every tax year until fully absorbed.
• Filing at the Partnership Level: Attempting to file Form 172 for a partnership or S corporation entity rather than on individual partner/shareholder returns.

10. Penalties for Non-Filing or Errors

Failing to calculate or report Net Operating Losses correctly on Form 172 can lead to serious tax adjustments and financial consequences.

Key risks include:

• Disallowance of Loss Deductions: The IRS may disallow your claimed NOL carryforward deduction if it is not supported by Form 172 calculations.
• Back Taxes and Interest: Overstating an NOL deduction reduces your tax bill incorrectly, resulting in back taxes and accrued interest when audited.
• Accuracy-Related Penalties: The IRS can assess a 20% accuracy-related penalty under Internal Revenue Code Section 6662 for substantial understatement of income tax or negligence in reporting loss deductions.

11. Related Forms or Schedules

Form 172 works in coordination with several core individual, estate, and business tax forms:

• Form 1040: U.S. Individual Income Tax Return (and Schedule 1 for reporting NOL deductions).
• Form 1041: U.S. Income Tax Return for Estates and Trusts.
• Form 1045: Application for Tentative Refund (used when carrying back eligible farming losses).
• Schedule C: Profit or Loss From Business (Sole Proprietorship).
• Schedule E: Supplemental Income and Loss (Partnerships, S Corporations, Estates, Trusts).
• Form 4684: Casualties and Thefts.

12. Frequently Asked Questions

1. What is a Net Operating Loss (NOL)?

A Net Operating Loss occurs when a noncorporate taxpayer’s allowable tax deductions from business operations, rental activities, or disaster casualties exceed their gross income for the tax year.

2. Who needs to file IRS Form 172?

Form 172 is filed by individuals, estates, and trusts that incur a Net Operating Loss or are claiming an NOL carryforward deduction on their tax return.

3. Can I carry back a Net Operating Loss to previous tax years?

Under current federal tax rules, general Net Operating Losses arising after 2020 cannot be carried back to prior tax years; they can only be carried forward. An exception applies to certain farming losses, which may be carried back two years.

4. What is the 80% taxable income rule for NOL carryforwards?

When you carry forward an NOL arising in tax years after 2017, your deduction in any future tax year cannot exceed 80% of your taxable income for that year (calculated before applying the NOL deduction).

5. Do S corporations or partnerships file Form 172?

No. S corporations and partnerships do not file Form 172 at the business level. Business losses pass through to individual partners or shareholders, who then calculate their personal NOL on Form 172.

6. How long can I carry forward an unused Net Operating Loss?

Under current tax law, Net Operating Losses generated in tax years after 2017 can be carried forward indefinitely until fully absorbed by future taxable income.

13. Conclusion

IRS Form 172 is an essential tool for individuals, small business owners, and estate fiduciaries navigating tax losses. By accurately isolating business losses from personal deductions, the form ensures compliance with complex federal tax laws.

Whether you are calculating a new loss from a small business or applying an NOL carryforward under the 80% taxable income limit, completing Form 172 accurately protects your financial deductions and ensures seamless tax reporting.