What's an NOL and Who Can Claim It?
NOLs occur when you have more tax deductions than taxable income. NOLs usually happen when you own or co-own a business that loses money. They can occur in businesses of all sizes, from small sole proprietorships to big corporations. If you're a sole proprietor, your business losses are always deducted on your personal tax return. If you're the owner or co-owner of a business organized as a partnership, limited liability company (LLCs), or S corporation, any losses pass through the business to you and any other owners who may deduct their share on their individual returns. If you're the shareholder in a C corporation, any losses are deducted by the corporation, not by the shareholders.
It is possible for an individual who is not a business owner to have an NOL. This can occur when a person has large casualty losses—for example, a taxpayer’s home is destroyed in a federally declared disaster and he or she had no or inadequate insurance, resulting in a large deductible casualty loss that exceeds the taxpayer's income. In such cases, the casualty loss is treated the same as a business loss. Follow the rules for non-corporate taxpayers, such as sole proprietorships.
How Do You Claim an NOL?
In the past, 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 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. However, the TCJA eliminated carrybacks for NOLs. Starting in 2018 and continuing through 2025, an NOL may only be deducted against the current and future taxes. However, a two-year carryback continues to apply for certain losses incurred by farming businesses. Also, the old rules continue to apply to NOLs incurred before 2018.
Moreover, the TCJA permits taxpayers to deduct NOLs only up to 80% of taxable income for the year (not counting the NOL deduction). Any unused NOL amounts may be carried forward any number of future years. This means you deduct it from your future year’s taxes until you use it up. (Under prior law, which continues to apply to pre-2018 NOLs, NOLs could be carried forward no more than 20 years.)
How Much is Your NOL?
Use the information on your tax return and Form 1045, Application for Tentative Refund, to determine the size of your NOL. Be careful. The rules and formulas are complicated, and they're different for non-corporate and corporate taxpayers.
Non-Corporate Taxpayers
If you’re a non-corporate taxpayer (that is, a sole proprietor or owner of a pass-through entity such an LLC or S corporation), when you calculate your NOL you must exclude a number of deductions you may have taken on your individual tax return. For example, when calculating your NOL, you can't include:
net capital losses--the amount that your capital losses are more than your capital gains (capital gains and losses arise from the sale of capital assets, like stocks)
NOL deductions from prior years
the pass-through tax deduction, and
non-business deductions that exceed nonbusiness income, including itemized deductions or the standard deduction if you didn't itemize.
The NOL calculation does include:
itemized deductions for casualty and theft losses, and
the deduction of half of your self-employment tax.
Example: Let’s say you're the sole proprietor of a small business and you also have a part-time job. Your 2018 tax return looks like this:
Your income totals $5,500:
Wages from part-time job = $3,500
Interest income from personal savings account = $500
Net long-term capital gain on the sale of gold held for investment = $1,500
Your deductions total $21,000:
Net business losses = $7,500 (gross income $68,500 minus $76,000 in expenses)
Net short-term capital loss on sale of stock = $1,500
Standard deduction = $12,000 (you're single)
Your deductions are more than your income, so you may have an NOL. To find out, go to Form 1045, Application for Tentative Refund and take out certain items:
Non-business net short-term capital loss on sale of stock = $1,500
Non-business deductions = $10,000 (standard deduction minus non-business interest income and capital gain income, or $12,000 - $500 - $1,500)
Total = $11,500
You have an NOL of $4,000: Deductions minus Form 1045 removed items minus total income = NOL ($21,000 - $11,500 - $5,500 = $4,000). You may deduct this NOL in any number of future years until it is used up. However, your NOL may not reduce your taxable income for any future year by more than 80%.
Corporate Taxpayers
Regular C corporations generally figure and deduct an NOL the same way as non-corporate taxpayers. First check if you have an NOL. The key figure is on line 28, Form 1120, U.S. Corporation Income Tax Return. If it's negative, there may be an NOL.
The main differences between corporate and non-corporate NOLs are that corporations:
can use the deduction for dividends paid on certain preferred stock of public utilities, without limiting it to its taxable income for the year, and
can take the deduction for dividends received, without regard to the aggregate limits that normally apply.
The last difference is the most important for many corporations. Normally, a corporation can deduct dividends received from other U.S. corporations, but the deduction is limited to a total of 70% or 80% of the corporation's taxable income. However, if the corporation has an NOL, the taxable income limitation doesn't apply.
Example: In 2018, Corporation A had $500,000 of gross income from business operations and $625,000 of allowable business expenses. It also received $150,000 in dividends from a U.S. corporation for which it can take an 80% deduction, which would normally be limited to 80% of its taxable income before the deduction.
The corporation calculates its NOL as follows:
Gross income = $650,000 (business income + dividends ($500,000 + $150,00 = $650,000), minus
$625,000 deduction for expenses, minus
$120,000 deduction for dividends-received ($150,000 x 80% = $120,000).
For 2018 it has an NOL of $95,000 ($650,000 – $625,000 – $120,000 = $-95,000). It may carry forward the NOL to any number of future years to reduce its taxable income up to 80% each year until the NOL is used up.
To report NOLs, corporations use Form 1120, U.S. Corporation Income Tax Return.
Annual Dollar Limit on NOL Deduction
The TCJA limits deductions of “excess business losses” by individual business owners. Married taxpayers filing jointly may deduct no more than $500,000 per year in total business losses. Individual taxpayers may deduct no more then $250,000. If a business is owned through a multi-member LLC taxed as a partnership, partnership, or S corporation, the $250,000/$500,000 limit applies to each owners’ or members’ share of the entity’s losses. Unused losses may be deducted in any number of future years as part of the taxpayer's NOL carryforward. This limitation took effect in 2018 and is scheduled to last through 2025. It does not apply to C corporations.
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