How LLC Owners Save on Taxes in 2026

FREE DOWNLOAD

Sign In

Sign In

Book Consultation
Tax Intelligence › Strategy Library › Net Operating Loss (NOL) Carryforward IRC §172 Business Tax Strategy Updated April 2026

Net Operating Loss (NOL) Carryforward: How to Maximize the Value of Business Losses Under IRC §172 in 2026 — Post-TCJA Rules, 80% Limitation, and Strategic Planning for Profitable Future Years

A net operating loss (NOL) arises when a taxpayer’s allowable deductions exceed gross income for the taxable year. Under IRC §172, NOLs generated after December 31, 2017 (post-TCJA) can be carried forward indefinitely but are limited to 80% of taxable income in the carryforward year (before the NOL deduction). This 80% limitation — one of the most significant changes made by the Tax Cuts and Jobs Act — means that a taxpayer with a large NOL carryforward can never fully offset taxable income in a single year; they will always owe tax on at least 20% of taxable income. Understanding the post-TCJA NOL rules, the interaction with other deductions and credits, and the strategic planning opportunities for clients with NOL carryforwards is essential for practitioners who serve business owners, real estate investors, and startup founders. This guide covers the post-TCJA rules, the excess business loss limitation under §461(l), the interaction with the QBI deduction, and the specific planning strategies to maximize the value of NOL carryforwards.

80%
Maximum percentage of taxable income that can be offset by post-TCJA NOL carryforwards in any single year — the remaining 20% is always taxable, regardless of the size of the NOL carryforward; this limitation does not apply to NOLs generated before January 1, 2018
Indefinite
Carryforward period for post-TCJA NOLs — NOLs generated after December 31, 2017 can be carried forward indefinitely with no expiration; pre-TCJA NOLs could only be carried forward 20 years and could be carried back 2 years (carryback was eliminated for most taxpayers by TCJA)
$313,000
2026 excess business loss limitation for single filers under IRC §461(l) — business losses exceeding this threshold ($626,000 MFJ) are disallowed and converted to an NOL carryforward; this is a separate limitation that applies before the §172 NOL rules
No Carryback
Post-TCJA NOLs generally cannot be carried back to prior years (with limited exceptions for farming losses and certain insurance company losses) — the elimination of the carryback was a significant change from pre-TCJA law, which allowed a 2-year carryback that could generate immediate tax refunds
✓ NOL Authority: IRC §172 ✓ 80% Limitation: IRC §172(a)(2) (post-TCJA) ✓ Excess Business Loss: IRC §461(l) ✓ 2026 EBL Limit: $313,000 single / $626,000 MFJ (indexed) ✓ NOL Reporting: Form 1045 (carryback) / Schedule A (Form 1045) for carryforward
NOL AuthorityIRC §172
80% LimitationIRC §172(a)(2)
Excess Business LossIRC §461(l)
At-Risk RulesIRC §465
Passive ActivityIRC §469
QBI InteractionIRC §199A(b)(1)(B)

The Loss Limitation Ordering Rules: What Happens Before the NOL

Before a business loss becomes an NOL, it must pass through a series of loss limitation rules in a specific order. Practitioners who skip these ordering rules will produce incorrect NOL calculations. The correct order is:

  1. Basis limitation (IRC §704(d) for partnerships, §1366(d) for S-Corps). A partner or S-Corp shareholder can only deduct losses up to their tax basis in the entity. Losses in excess of basis are suspended and carried forward until the taxpayer has sufficient basis.
  2. At-risk limitation (IRC §465). Even if the taxpayer has sufficient basis, losses are further limited to the amount the taxpayer has “at risk” in the activity. At-risk amount generally equals the taxpayer’s cash investment plus the adjusted basis of contributed property, plus certain recourse debt. Nonrecourse debt (with limited exceptions for qualified nonrecourse financing in real estate) does not increase at-risk amount.
  3. Passive activity loss limitation (IRC §469). Losses from passive activities (activities in which the taxpayer does not materially participate) can only offset passive income. Excess passive losses are suspended and carried forward to future years when the taxpayer has passive income or disposes of the passive activity.
  4. Excess business loss limitation (IRC §461(l)). After applying the basis, at-risk, and passive activity limitations, the remaining business loss is subject to the excess business loss (EBL) limitation. In 2026, the EBL limit is $313,000 single / $626,000 MFJ. Business losses exceeding this threshold are disallowed and converted to an NOL carryforward for the following year.
  5. NOL carryforward (IRC §172). The NOL carryforward (including amounts converted from disallowed EBLs) can offset up to 80% of taxable income in the carryforward year.

Strategic Planning for Clients With Large NOL Carryforwards

A client with a large NOL carryforward has a valuable tax asset that requires careful planning to maximize. Key strategies include:

Accelerate income into years with NOL carryforwards. The 80% limitation means the client will always owe tax on 20% of taxable income, but the NOL carryforward reduces the effective tax rate on the remaining 80%. In years when the client has a large NOL carryforward, it may be advantageous to accelerate income (Roth conversions, installment sale elections, deferred compensation distributions) to use the NOL carryforward at the current tax rate before rates potentially increase.

Roth conversion strategy. A client with a $500,000 NOL carryforward and $400,000 of traditional IRA assets can convert $400,000 to a Roth IRA, using the NOL to offset 80% of the conversion income ($320,000). The client pays tax on only $80,000 of the $400,000 conversion. The Roth IRA then grows tax-free, and future distributions are tax-free. This is one of the most powerful uses of a large NOL carryforward.

Avoid unnecessary deductions in high-NOL years. If the client already has more NOL carryforward than they can use in the foreseeable future, accelerating additional deductions (prepaying expenses, taking bonus depreciation) may be counterproductive. The additional deductions increase the NOL carryforward but do not produce immediate tax savings, and the time value of the deferred tax benefit is reduced.

Frequently Asked Questions

My client has both pre-TCJA and post-TCJA NOL carryforwards. Which one gets used first, and does the 80% limitation apply to both?›

This is one of the most common NOL questions and the answer is nuanced. Pre-TCJA NOLs (generated before January 1, 2018) are not subject to the 80% limitation — they can offset 100% of taxable income. Post-TCJA NOLs (generated after December 31, 2017) are subject to the 80% limitation. When a taxpayer has both pre-TCJA and post-TCJA NOL carryforwards, the ordering rules matter significantly. Under IRC §172(b)(2), NOLs are used in the order in which they arose — the oldest NOLs are used first. This means pre-TCJA NOLs (which can offset 100% of taxable income) are used before post-TCJA NOLs (which are limited to 80%). From a planning perspective, this is generally favorable: the pre-TCJA NOLs provide full offset, and the post-TCJA NOLs are preserved for future years. However, if the client has a large pre-TCJA NOL that will take many years to use, and the post-TCJA NOL is growing each year, the practitioner should model the projected NOL usage to determine whether the client will ever fully utilize the carryforwards. If not, strategies to accelerate income (Roth conversions, installment sale elections) should be considered to use the NOLs before they become economically worthless due to the time value of money.

How does the NOL interact with the QBI deduction? Can my client take both?›

The interaction between the NOL deduction and the QBI deduction is one of the most complex areas of post-TCJA tax planning. The key rule under IRC §199A(b)(1)(B): the QBI deduction is calculated based on the taxpayer’s “combined qualified business income” which is reduced by any prior year QBI carryforward losses. If the taxpayer has a negative QBI in the current year (i.e., the qualified business generated a loss), that negative QBI is carried forward to the next year and reduces the QBI deduction in the carryforward year. This is separate from the NOL carryforward. The NOL and the QBI carryforward are two separate items that must be tracked independently. In a year when the taxpayer has both an NOL carryforward and a QBI carryforward, the NOL reduces taxable income (subject to the 80% limitation), and the QBI carryforward reduces the QBI deduction. The practical implication: a client who had a large business loss in a prior year may have both a large NOL carryforward AND a large negative QBI carryforward. In the year the business returns to profitability, the NOL reduces taxable income, and the negative QBI carryforward reduces the QBI deduction. The client may owe more tax than expected because the QBI deduction is reduced by the prior year loss. Practitioners must track both carryforwards separately and model the interaction in profitable years.

More Tax Planning FAQs

What is the IRS audit risk for this strategy?
The IRS audit rate for individual returns is approximately 0.4% overall, but increases significantly for returns with Schedule C income, large deductions, or specific strategies. Proper documentation is the best defense against an audit. Keep contemporaneous records, maintain written agreements, and ensure all deductions are supported by receipts and business purpose documentation.
How does this strategy interact with the alternative minimum tax (AMT)?
Many tax strategies that reduce regular income tax can trigger or increase AMT liability. Common AMT triggers include: ISO exercises, large state tax deductions, accelerated depreciation, and passive activity losses. Taxpayers should model both regular tax and AMT before implementing aggressive tax strategies to ensure the net benefit is positive.
What is the statute of limitations for IRS assessment of this strategy?
The IRS generally has three years from the later of the return due date or filing date to assess additional tax. If the taxpayer omits more than 25% of gross income, the statute is extended to six years. There is no statute of limitations for fraudulent returns or failure to file. Taxpayers should retain tax records for at least seven years to cover the extended statute of limitations.
How should this strategy be documented to withstand IRS scrutiny?
Documentation is the cornerstone of any tax strategy. Maintain contemporaneous records (created at the time of the transaction), written agreements, business purpose statements, and receipts. For strategies involving related parties, ensure all transactions are at arm’s length and documented with fair market value support. The burden of proof is on the taxpayer to substantiate deductions.
What is the economic substance doctrine and how does it apply?
The economic substance doctrine (§7701(o)) requires that transactions have both objective economic substance (a reasonable possibility of profit) and subjective business purpose (a non-tax reason for the transaction). Transactions that lack economic substance are disregarded for tax purposes, and the 40% strict liability penalty applies. Legitimate tax planning strategies must have genuine business purposes beyond tax reduction.
How does this strategy affect state income taxes?
Federal tax strategies do not always produce the same results at the state level. Some states do not conform to federal tax law changes (e.g., bonus depreciation, QSBS exclusion). Taxpayers should model the state tax impact of any federal tax strategy, especially in high-tax states like California, New York, and New Jersey. Some strategies may save federal taxes while increasing state taxes.
What is the step-transaction doctrine and how does it apply?
The step-transaction doctrine allows the IRS to collapse a series of related transactions into a single transaction if the intermediate steps have no independent significance. This doctrine is used to prevent taxpayers from using artificial multi-step transactions to achieve tax results that would not be available in a single transaction. Legitimate tax planning strategies should have independent business purposes for each step.
How does this strategy interact with the passive activity loss rules?
Passive activity losses (§469) can only offset passive income. Active business income, wages, and portfolio income are not passive. Real estate rental income is generally passive unless the taxpayer qualifies as a Real Estate Professional. Passive losses that cannot be used currently are suspended and carried forward to offset future passive income or recognized when the passive activity is disposed of in a fully taxable transaction.
What is the at-risk limitation and how does it affect deductions?
The at-risk limitation (§465) limits deductions to the amount the taxpayer has at risk in the activity. At-risk amounts include cash invested, property contributed, and amounts borrowed for which the taxpayer is personally liable. Non-recourse debt (except qualified non-recourse financing for real estate) does not increase the at-risk amount. Losses in excess of the at-risk amount are suspended and carried forward.
How does this strategy affect the taxpayer’s basis in the business?
Basis tracking is essential for pass-through entities (S-Corps, partnerships). Contributions increase basis; distributions and losses decrease basis. A shareholder or partner cannot deduct losses in excess of their basis. Distributions in excess of basis are taxable as capital gains. Taxpayers should maintain a basis schedule and update it annually to track the impact of income, losses, and distributions.
What is the constructive receipt doctrine and how does it apply?
The constructive receipt doctrine requires taxpayers to recognize income when it is made available to them, even if they have not actually received it. For example, a check received before year-end must be included in income for that year, even if not deposited until the following year. Taxpayers cannot defer income by refusing to accept payment or by instructing the payer to delay payment.

Ready to Reduce Your Tax Burden?

Our tax advisors specialize in helping professionals and business owners implement these strategies. Book a free strategy call to see how much you could save.

Book A Strategy Call With A Tax Advisor
A $500K NOL carryforward can fund a $400K Roth conversion with tax on only $80K — the NOL is a strategic asset, not just a loss

Be the Practitioner Who Turns the NOL Into a Strategy. Uncle Kam Connects Business Owners With Tax Planners Who Know IRC §172.

Apply to Join the Marketplace → How It Works
Free access to 300+ tax strategies Join the Marketplace →