Net Operating Loss Tax Overview
Overview
Losses incurred prior to 2018:
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Carrybacks
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General: 2 years
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Casualty or theft: 3 years
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Qual. Small business in disaster area: 3 years
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Farm & Go Zone: 5 years
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Specified Liability: 10 years
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Waiver of 5-yr and 10-yr carryback: Reverts to 2- or 3- year carryback
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Waiver of all carryback: Losses carried forward only
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Carryforward: Limited to 20 years
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Limitation: Deduction limited to taxable income of deduction year
Losses incurred 2018, 2019 or 2020 (CARES Act & COVID Relief Act):
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Carryback: 5 years
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Waiver of 5-yr carryback: Losses carried forward only
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Carryforward: Until used up
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Limitation: Deduction limited to 80% of taxable income in deduction year if deduction year is after 2020; otherwise deduction limited to 100% of deduction year’s taxable income
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Farmers: Allowed to retain 2-year carryback if desired; can revoke waiver not to carry back
Losses incurred 2021 or later (TCJA):
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Carrybacks
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General: No carryback
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Farm: 2 years
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Carryforward: Until used up
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Limitation: Deduction limited to 80% of taxable income in deduction year
Form: Use Form 1045 to carry back if filed by end of year after NOL year; otherwise use 1040X
Related IRC and IRS Publications and Forms
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Form 172 - Important: Effective for tax year 2024 and subsequent years, the IRS (1) introduced a new Form 172 that is used to calculate an NOL and (2) modified Form 1045 to be used for NOL carrybacks, which is currently limited to farmers.
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Form 1045 - Application for Tentative Refund
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Form 1040X – Amended Tax Return
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Pub 536 – Net Operating Losses (NOLs) For IndividualsI
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IRC Sec 172
A net operating loss results from a business loss or a personal casualty loss. In order to have an NOL, a taxpayer generally must have a NEGATIVE AGI, or a casualty loss as part of itemized deductions. However, a positive AGI, which consists of positive non-business income and a business loss may also create a net operating loss, if there are non-business deductions to offset the non-business income.
The net operating loss deduction is an exception to the general rule that computation of income tax for a given year is based on that year’s income and deductions only. The reason for this is that when a net operating loss occurs, the loss is computed in the year of occurrence, but that loss is carried to the returns of other years and is used as a deduction in those years, resulting in a reduction of income tax (but not self-employment tax) for the other years. Carry backs/carryovers of NOLs are explained in more detail later in this guide.