The IRS’s ‘NOL Carryforward’ Rule: How to Use Your Business Losses to Lower Future Taxes
For many small business owners, a bad year can mean a loss instead of a profit. But did you know that you could use those losses to reduce your tax burden in future years? The Net Operating Loss (NOL) Carryforward rule is one of the IRS’s lesser-known provisions that can benefit businesses struggling with a downturn. If you’ve recently experienced a year where your business expenses exceeded your revenue, this rule could help you save money in the long run.
What is a NOL?
NOL happens when your business expenses exceed its income for the year. This means you won’t owe taxes on that income. The NOL carryforward provision allows you to apply those losses to future profitable years, reducing taxable income and taxes owed in those yearsr, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.
How Does the NOL Carryforward Work?
The IRS’s NOL carryforward rule lets businesses use losses from one year to reduce taxable income in future profitable years. You can carry the loss forward indefinitely, but it only offsets up to 80% of taxable income under the Tax Cuts and Jobs Act.
Why It’s Important:
Tax Relief: Reduces taxes when you return to profitability
Better Cash Flow: Lowers future tax bills when you earn more
Strategic Planning: Helps businesses plan for fluctuating income
How to Claim It:
File your tax return for the year you incurred the loss
Use forms 1045 or 1040X to report the carryforward
Keep track of your losses for future use
Pitfalls:
NOL rules can be complex, so consult a tax professional
Not all losses qualify for the carryforward
NOLs can only reduce taxes in future profitable years, not the year of the loss
