Net operating loss (NOL) limitations have become a central theme in business tax planning. For tax professionals, understanding how today’s loss limitations work and how recent legislation has reshaped them is critical for modeling cash flow, entity choice, and strategic timing of income and deductions. To help you better understand this topic, we're providing a higher-level look at NOL limitations and how recent laws impact how they're calculated.
What Are NOL Limitations?
At the most basic level, NOL limitations are the tax rules that restrict how much taxable income a taxpayer can offset with net operating losses in a given year. An NOL generally arises when a taxpayer’s allowable business deductions exceed gross income for the year, measured under a special set of rules.
From a client-facing perspective, NOL limitations drive two economic questions:
- How far can a loss be carried (back or forward)?
- How much current-year taxable income can those losses offset?
Those are the loss limitations that determine whether a “paper loss” actually translates into a real-world cash tax benefit now or in the future.
High-Level Overview of NOL Computation
The detailed mechanics differ for individuals and corporations, but it helps to frame the NOL calculation as a modified taxable income computation with specific add-backs and exclusions.
Individuals
For individuals, a high-level approach looks like this:
- Start from taxable income.
- Remove the NOL deduction itself (to avoid circularity).
- Remove capital losses in excess of capital gains (excess capital losses cannot be used to create or deepen an NOL).
- Remove nonbusiness deductions that exceed nonbusiness income (personal deductions cannot manufacture an NOL).
- Remove certain special deductions or exclusions (for example, the qualified business income deduction and specified exclusion items).
The goal is to arrive at a “pure” trade or business–driven net operating loss, rather than a loss subsidized by personal or investment-side items.
C Corporations
For corporations, the concepts are similar but apply to corporate-specific items:
- Start from taxable income before the NOL deduction.
- Remove the NOL deduction itself.
- Recompute certain dividends-received deductions under rules tailored for NOL years.
- Remove specific incentive-style deductions that are not meant to deepen an NOL.
The final figure is the NOL for that loss year, which can then be carried to other years subject to NOL limitations and other loss limitations.
NOL Limitations 2017—2024
Between the 2017 Tax Cuts and Jobs Act (TCJA) and the 2020 CARES Act, NOL limitations changed significantly. Let's look at these changes before we look at current day NOL limitations.
NOL Limitations with the TCJA
The Tax Cuts and Jobs Act (TCJA) fundamentally reset the federal NOL framework for losses arising in tax years beginning after 2017. For tax pros, three pillars define the “new normal” for NOL limitations and loss limitations:
1. Carrybacks Largely Eliminated
Most post-2017 NOLs can no longer be carried back to prior tax years. Only narrow categories, such as certain farming losses and a few special industries, retain limited carryback rights.
This change removed a powerful cash-flow lever. Historically, businesses could generate a loss in a downturn and quickly carry it back to high-profit years to obtain a refund. Under TCJA, that option is generally off the table.
2. Indefinite Carryforward
In exchange, TCJA allowed NOLs arising in post-2017 years to be carried forward indefinitely. Instead of expiring after, say, 20 years, NOLs can now be used as far into the future as the business remains in existence.
From a planning perspective, the time horizon is less restrictive—but the annual usage limitation (discussed next) often matters more in practice.
3. The 80% of Taxable Income Limitation
TCJA introduced the modern “80% limitation” on NOL usage. In any given year, the NOL deduction for post-2017 losses generally cannot exceed 80% of taxable income, computed without regard to the NOL deduction itself and certain other deductions.
In other words, even a business with large NOL carryforwards is now often required to pay tax on at least 20% of its taxable income. That is the core NOL limitation that tax professionals must build into projections.
Critically, pre-2018 NOLs are typically not subject to this 80% cap and are applied first. Tracking pre-TCJA and post-TCJA NOLs separately and understanding the ordering rules is now an essential part of managing loss limitations.
CARES Act: Temporary Relief from NOL Limitations
The CARES Act responded to the COVID-19 crisis by temporarily relaxing NOL limitations and loss limitations to get cash back into businesses more quickly. Its changes were powerful but time-bound.
Five-Year Carryback for 2018–2020 NOLs
NOLs arising in tax years beginning in 2018, 2019, and 2020 could be carried back up to five years. That meant losses from those years could reach back into higher-rate pre-TCJA years, often generating significant refunds.
This temporary restoration of carrybacks was a major planning opportunity for many businesses and their advisors.
Suspension of the 80% Limitation
For certain tax years beginning before 2021, the CARES Act suspended the 80% of taxable income cap. In those years, taxpayers could often use NOLs to offset up to 100% of taxable income, eliminating the built-in “floor” of taxable income created by the TCJA.
The interaction of that suspension with timing of income and deductions created meaningful opportunities for careful taxpayers.
Interaction with Other Loss Limitations
Even under the CARES Act, NOLs still had to navigate other loss limitations—such as at-risk rules, passive activity loss limitations, and the excess business loss rules under section 461(l). In practice, the CARES relief applied to NOL limitations under section 172, but practitioners still needed to walk through the full hierarchy of loss limitations to determine how much could actually move between years.
As the CARES Act provisions expired, the more restrictive TCJA framework reasserted itself, and NOL limitations normalized again for post-2020 years.
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How Did Loss Limitations Change with the One Big Beautiful Bill Act?
When the One Big Beautiful Bill Act was signed into law in 2025, several technical details changed and are important for tax professionals writing or advising on NOL limitations:
The 80% Limitation Is Permanent
The Act effectively confirmed that the 80% NOL limitation is not a temporary experiment. It is now baked in as a long-term structural feature of the Code.
For planning purposes, this means that large NOL carryforwards are unlikely to erase tax liability entirely in profitable years. Instead, businesses must plan around a recurring “minimum” taxable income base.
Narrow, Clarified Carryback Exceptions
The OBBBA refined the rules around which taxpayers retain carryback rights—such as certain farmers and other targeted sectors—while making clear that a broad, general carryback regime is not returning.
This distinction between general NOLs and special-case NOLs is increasingly important, especially for industries that straddle multiple categories or undergo reorganizations.
Clearer Coordination with Other Loss Limitations
Finally, the OBAAA and subsequent guidance helped clarify how NOL limitations interact with other loss limitations, including:
- At-risk limitations
- Passive activity loss limitations
- Excess business loss rules for noncorporate taxpayers
The practical reality today is that loss limitations operate in layers. NOLs are often the last step in a chain of limitations: a loss may first be limited by at-risk rules, then passive rules, then excess business loss rules, and only the resulting allowed loss can feed into the NOL calculation and be carried to other years.
For practitioners, that layered architecture is now a central feature of any sophisticated NOL limitation analysis.
Practical Planning Considerations for Tax Professionals
To make content on NOL limitations and loss limitations resonate with a technical audience, it helps to tie the rules to concrete planning moves. Here are several angles you can emphasize:
1. Model the 80% Cap
When forecasting tax liabilities, assume that post-2017 NOLs will generally only shelter up to 80% of taxable income in a given year. This affects:
- Estimated tax payments
- Entity-level versus owner-level tax planning
- Decisions about deferring income or accelerating deductions
Even clients with “plenty of NOLs” can be surprised when they still owe tax because of the 80% NOL limitation.
2. Track NOL “Vintages” and Ordering
Pre-2018 and post-2017 NOLs are not interchangeable. They can be subject to different rules and ordering priorities, particularly around the 80% limitation and carryforward periods.
Maintaining clear schedules of NOL “vintages” is now a must. This helps you:
- Use older, more flexible NOLs before newer, more restricted ones
- Avoid inadvertent expiration or suboptimal application
- Support planning around mergers, acquisitions, and ownership changes where section 382 may come into play
3. Layer in Other Loss Limitations
Viewing NOLs in isolation is no longer sufficient. A modern workflow for a pass-through owner or individual might look like:
- Apply at-risk rules.
- Apply passive activity loss limitations.
- Apply excess business loss rules under section 461(l).
- Compute the resulting NOL, then apply NOL limitations under section 172.
At each step, the effective benefit of a “loss” can shrink, and understanding where the bottleneck lies is key to effective planning.
4. Don’t Ignore State-Level NOL Limitations
State conformity to federal NOL rules is uneven. Some states:
- Disallow NOL deductions in certain years
- Cap NOL usage at a percentage of state taxable income
- Limit carryforward periods more aggressively than federal law
- Temporarily suspend NOL usage as a budget measure
When you discuss NOL limitations in a blog aimed at practitioners, it’s worth reminding readers that state loss limitations can dramatically change the overall tax picture and should be modeled alongside federal calculations.
Bringing It All Together
NOL limitations and broader loss limitations now define how, when, and whether losses translate into real tax savings. TCJA created a new baseline with no general carrybacks, indefinite carryforwards, and an 80% NOL limitation. The CARES Act briefly relaxed those rules to provide liquidity during the pandemic, and the One Big Beautiful Bill Act has since reinforced and refined the framework, confirming that layered loss limitations are here to stay.
For tax professionals, that means NOLs are no longer just a line item on a return—they are a strategic asset that must be tracked by vintage, modeled under multiple limitation regimes, and coordinated with both federal and state rules. Done well, that work turns “paper losses” into precisely timed, maximized tax benefits across the life of a business.
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