In 2025, Net Operating Loss (NOL) rules continue to limit deductions to 80% of taxable income with no carrybacks allowed. For U.S. taxpayers, this means planning your carryforward strategy is more critical than ever. Let’s break down the IRS rules and how you can use them to minimize tax liability.
What Is a Net Operating Loss (NOL)?
An NOL occurs when your business deductions exceed your gross income in a given tax year. Individual taxpayers with sole proprietorships, partnerships, or S corporation pass-through income often encounter NOLs when expenses outweigh revenue.
While NOLs can reduce taxes in future years, the IRS has restricted how and when they can be used.
Key NOL Rules in 2025
- 80% limitation: NOL deductions can only offset up to 80% of taxable income in the year applied.
- No carrybacks: You cannot carry NOLs to prior years for refunds (a change made permanent by the Tax Cuts and Jobs Act).
- Unlimited carryforwards: You may carry forward NOLs indefinitely until they are fully used, subject to the 80% cap.
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How the 80% Limitation Works
Suppose your taxable income in 2025 is $100,000 before applying an NOL. You may only use your NOL to reduce 80% of taxable income ($80,000), leaving at least $20,000 taxable even if your NOL is larger.
Example: If you have an NOL carryforward of $120,000, you can only deduct $80,000 in 2025, leaving $40,000 to carry forward again.
Smart NOL Planning Strategies
- Time your income: If possible, defer or accelerate business income to maximize NOL benefits.
- Coordinate with other deductions: Use credits and above-the-line deductions to optimize the taxable base.
- Track carryforwards carefully: Keep detailed records since unused NOLs can roll forward indefinitely.
- Consider NIIT impact: For high-income taxpayers, combine NOL strategy with Net Investment Income Tax planning.
Who Benefits from NOLs?
NOL rules are particularly useful for small business owners, self-employed professionals, gig workers, and investors whose income fluctuates. With proper tracking, these taxpayers can smooth out income over multiple years and reduce long-term tax burdens.
Key Takeaways for 2025
- NOL deductions are capped at 80% of taxable income.
- No carrybacks—losses cannot be applied to past returns.
- Unlimited carryforwards give taxpayers flexibility in future years.
- Strategic planning can minimize tax liability for years to come.
