Net Operating Losses (NOLs) are a powerful tax tool for corporations that have experienced more deductions than income in a given tax year. For C corporations filing IRS Form 1120, properly handling NOLs can result in significant tax savings by offsetting taxable income in future years. Understanding how NOLs work and how they should be reported is critical for corporate tax compliance and planning.
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What is a Net Operating Loss (NOL)?
An NOL occurs when a corporation’s tax-deductible expenses exceed its taxable income within a tax year. These losses do not simply disappear — the IRS allows corporations to carry them forward to reduce taxable income in future years.
For tax years beginning after December 31, 2017, and before January 1, 2021, NOLs could be carried back five years and carried forward indefinitely. However, under current law (as of 2025), the carryback is generally not allowed for most taxpayers, and carryforwards are limited to offsetting 80% of taxable income in a future year.
Reporting NOLs on Form 1120
When completing IRS Form 1120, it’s important to understand where and how NOLs are reflected. Here’s what to focus on:
- Line 29a – Net Operating Loss Deduction: This line reports the amount of the NOL carryforward that is being used to offset current-year taxable income. The 80% limitation applies here.
- Schedule K, Question 12: Corporations must indicate whether they are using an NOL deduction.
- Schedule M-1 and M-2: Adjustments may be needed for book-to-tax income reconciliation when an NOL is applied.
Calculating the NOL
To determine an NOL, you must calculate taxable income according to IRS rules and then subtract all allowable deductions. Certain items are excluded when calculating an NOL, including:
- Net capital losses
- Dividends received deduction (DRD)
- Domestic production activities deduction (DPAD)
- Section 199A deduction (if applicable)
The result is reported on the corporation’s tax records and tracked for carryforward purposes using Form 1139 or the corporation’s tax workpapers.
Carrying Forward NOLs
Under current law, NOLs incurred in tax years beginning after 2020 can be carried forward indefinitely. However, only 80% of a corporation’s taxable income in any carryforward year can be offset using NOLs. This limitation prevents complete elimination of tax liability using large losses from prior years.
Example: If a corporation has $1,000,000 in NOL carryforward and $500,000 of taxable income in 2025, it may only apply $400,000 (80%) of the NOL, and will still owe tax on $100,000 of income.
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What is Form 1139?
While not used to report NOLs directly on Form 1120, corporations that are eligible to carry back an NOL (for special industries or prior-year filings) may file Form 1139 to request a quick refund of taxes previously paid. This form accelerates the refund process rather than waiting for a standard amended return.
Maintaining NOL Records
The IRS requires corporations to maintain detailed records of:
- Years in which NOLs were generated
- The amount of the NOL in each year
- Amounts used and remaining carryforward balance
Failure to document properly can result in denied deductions or penalties upon audit.
Common Errors in NOL Handling
Some of the most common mistakes corporations make when handling NOLs include:
- Incorrect application of the 80% limitation
- Failure to track year-by-year usage of carryforwards
- Using NOLs that have expired or were already used
- Claiming NOLs from disallowed deductions (like capital losses)
To avoid these, CPA firms often outsource this complex area of corporate tax filing to expert consultants.
PEAK Business Consultancy Services provides reliable, end-to-end support for Form 1120, including NOL analysis and compliance. We’ve supported CPA firms in the U.S. for over a decade in preparing returns, tracking losses, and managing IRS audit responses. Reach out to PEAK BCS for outsourced tax preparation with quality assurance.
NOLs and State Income Taxes
While the federal rules around NOLs are clearly defined, each U.S. state has its own treatment of NOLs. Some conform to federal rules, while others have different carryforward periods, limits, or disallow certain deductions entirely. Corporations operating in multiple states must carefully consider state-specific NOL rules when preparing composite or consolidated returns.
Conclusion
Net Operating Losses are a valuable tax planning tool for corporations that experience financial downturns. However, the rules governing their use on Form 1120 are complex and require careful application, particularly when tracking multi-year carryforwards or applying the 80% limitation. Whether you’re preparing your own return or assisting a client, always review IRS guidance thoroughly.
PEAK Business Consultancy Services is ready to help U.S. CPA firms handle all aspects of Form 1120 filings, including the intricacies of Net Operating Losses. Contact PEAK BCS today to explore our outsourced tax support services tailored for your firm’s needs.
