Net Operating Losses (NOLs)
A net operating loss (NOL) occurs when a taxpayer's allowable deductions exceed gross income, and the excess can be carried forward to offset taxable income in future years.
Explanation
Under current law (post-TCJA), NOLs arising in tax years after 2020 can be carried forward indefinitely but can only offset up to 80% of taxable income in the carryforward year. The 2-year carryback was generally eliminated by the TCJA (with temporary exceptions for 2018–2020 losses under the CARES Act). For corporations, the NOL deduction is computed before the dividends received deduction. Proper ordering of NOL usage across multiple years is a common exam topic.
Key Points
- •Post-2020 NOLs: carry forward indefinitely, limited to 80% of taxable income
- •No carryback generally (TCJA eliminated 2-year carryback)
- •NOLs do not include capital losses or nonbusiness deductions exceeding nonbusiness income (for individuals)
Exam Tip
Remember the 80% limitation applies to NOLs arising after 2020 — and that the limitation is based on taxable income before the NOL deduction itself.
Frequently Asked Questions
Related Topics
Corporate Taxation
Corporate taxation covers the tax rules for C corporations, which are taxed as separate entities at a flat 21% federal rate under current law.
Individual Taxation
Individual taxation covers the rules for computing taxable income, deductions, credits, and tax liability for individual taxpayers under the Internal Revenue Code.
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