Most net operating losses generated after 2020 cannot be carried back to earlier tax years at all. The general rule under IRC §172 now limits businesses to carrying an NOL forward indefinitely, with narrow exceptions for farming losses, certain insurance-company losses, and the temporary 2018 through 2020 carryback window Congress opened and then closed. Everything else depends on when the loss arose and what kind of taxpayer generated it.
TL;DR:
- Most non-farming net operating losses generated after 2020 cannot be carried back and are instead carried forward indefinitely, with exceptions for farming and insurance-company losses.
- The availability of a carryback depends on the tax year the loss arose and whether recent law changes, such as the CARES Act, temporarily allowed a five-year carryback for 2018-2020 losses.
- Carrybacks are advantageous only if taxable income existed in the relevant prior years and if the taxpayer’s future income is expected to be higher, as losses can be limited by the 80% taxable income cap after 2017.
- Filing a carryback claim requires specific forms (Forms 1045, 1139, or 1040-X) and detailed documentation, including worksheets showing the calculations and supporting loss records.
- Securing professional help is recommended for complex situations like ownership changes, multi-year losses, or IRS notices, to avoid errors and ensure accurate sequencing and application of losses.
Table of Contents
- What Does the Current Net Operating Loss Carryback Law Say?
- Which Losses Still Qualify for a Carryback?
- Should You Carry the Loss Back or Forward?
- How Do You File a NOL Carryback Claim?
- How Do You Calculate the 80% Taxable Income Limitation?
- What Triggers an IRS Review of a Carryback Claim?
- When Should You Bring in a Tax Resolution Specialist?
- The Part Most Guides Get Wrong About Carrybacks
- How Taxproblem Helps With NOL Carryback and Carryforward Issues
- Sources
- FAQ
What Does the Current Net Operating Loss Carryback Law Say?
The rules governing a net operating loss carryback split cleanly into three eras, and mixing them up is the single most common mistake taxpayers and even preparers make. Get the timeline wrong and you either miss a refund you were entitled to, or you file a claim the IRS will bounce back.
Before 2018, the law was generous. Businesses could carry an NOL back two years and carry it forward for many years, without a cap on how much taxable income the loss could offset. If you lost money in 2016, you could amend your 2014 return, get a refund, and move on.
The Tax Cuts and Jobs Act (TCJA) changed that starting with losses arising in tax years after December 31, 2017. It eliminated the two-year carryback for most taxpayers and introduced a limitation on how much of a later year’s taxable income an NOL could offset. Carryforward became indefinite, but the tradeoff was real: no more automatic look-back refund, and no more wiping out all taxable income with old losses.
Then came 2018 through 2020. The CARES Act temporarily allowed NOLs from those three tax years to be carried back for several years, and it suspended the limitation for losses used in tax years beginning before 2021. Thomson Reuters’ analysis of the CARES Act changes walks through exactly how that suspension worked and why it mattered for businesses that lost money during the pandemic years.
Since 2021, we’re back to the TCJA framework as the default, with the carryback largely gone again except for the exceptions covered in the next section. The instructions for Form 172 spell this out directly: carrybacks are “generally eliminated” for NOLs arising in tax years beginning after 2020, except for certain farming losses.
Here’s the framework in plain terms:
- Pre-2018 NOLs: 2-year carryback, 20-year carryforward, no percentage limitation on use.
- 2018-2020 NOLs: 5-year carryback available (unless waived), 80% limitation suspended for years before 2021.
- Post-2020 NOLs (general rule): No carryback, indefinite carryforward, subject to the 80% of taxable income limitation.
- Farming losses (any year): 2-year carryback still allowed under the exception described below.
IRS Publication 536 remains the primary guide for individuals, estates, and trusts figuring out which bucket their loss falls into and how to calculate the deduction correctly. Corporations lean more heavily on Form 1139 and its instructions, which we’ll get into later. The practical upshot: before you do anything else, nail down the tax year the loss arose in. That single fact determines which set of rules applies, and getting it wrong wastes time and, occasionally, triggers an IRS notice questioning your claim.
Which Losses Still Qualify for a Carryback?
Three situations still let you carry a net operating loss backward instead of just forward, and each has its own mechanics worth understanding before you assume you qualify.
Farming losses are the broadest surviving exception. A farming loss, generally the portion of your NOL attributable to farming operations, can still be carried back two years even for losses arising after 2020. If your total NOL includes both farming and nonfarming components, you have to separate them; only the farming portion gets the carryback treatment, and the nonfarming portion follows the standard no-carry back rule. Order matters here too: when a farmer has both a 2018-2020 NOL eligible for the five-year window and a later farming loss eligible for the two-year window, the Form 172 instructions walk through how to sequence the application of each so you don’t double up or misapply one year’s loss against income it was never meant to offset.
Insurance-company losses get separate treatment under the same statutory framework. Certain non-life insurance companies retained carryback rights that don’t apply to ordinary corporations, and their carryforward period runs 20 years rather than the indefinite period other taxpayers now use. This is a narrow lane, but if you’re running an insurance business, it’s one you need your preparer to check specifically, because assuming the general corporate rule applies here can cost you a legitimate carryback.
Corporate ownership changes don’t create a carryback right, but they can destroy one you’d otherwise have. Under Section 382, when a corporation undergoes a significant ownership change, typically a shift of more than 50 percentage points in ownership among certain shareholders, the amount of pre-change NOL that can be used in any future year gets capped based on the value of the corporation and a federal long-term tax-exempt rate. A corporation sitting on a large NOL carryforward can find that an ownership change, sometimes from something as routine as a funding round or a family succession plan, slashes how much of that loss it can actually use going forward. This is one of the most frequently missed issues in NOL planning, and it applies whether the loss in question was eligible for carryback or not.
Waiving a carryback is also worth knowing about, even outside the farming and insurance exceptions. In years where a carryback is available, a taxpayer can make an irrevocable election to forgo it and carry the loss forward instead. Once made, that election cannot be undone, so it needs to be a deliberate choice, not a default.
Pro Tip: If you farm and also run a side business, don’t let your preparer lump your NOL into one number. Splitting the farming and nonfarming portions is the only way to know how much of the loss actually qualifies for the two-year carryback.
Should You Carry the Loss Back or Forward?
When a carryback is actually available to you, whether through the farming exception, an insurance-company rule, or a 2018-2020 loss you haven’t yet elected to waive, the decision isn’t automatic. Carrying back generates cash faster. Carrying forward can be worth more over time. Here’s how to think it through.
Check whether you actually paid meaningful tax in the carryback years. A carryback only produces a refund if you had taxable income, and paid tax on it, in the year you’re carrying the loss to. If those years were already low-income or loss years themselves, there’s little or nothing to recover.
Estimate your future tax bracket against your current one. If you expect significantly higher taxable income in coming years, perhaps a business is recovering from a rough stretch and heading into stronger years, carrying the loss forward to offset that future income at a higher marginal rate can be worth more than an immediate refund at a lower rate.
Run the Alternative Minimum Tax exposure in the carryback year. This is the step people skip and regret. Carrying a loss into an earlier year can interact with AMT calculations in ways that shrink the refund you expected, sometimes substantially. Both Form 172 and Publication 536 specifically flag this risk, and it’s worth refiguring the carryback year’s full return, not just penciling in the loss.
Confirm whether you’re holding pre-2018 NOLs alongside newer losses. Older NOLs don’t face the 80% limitation and get applied under different ordering rules. Mixing them up in your calculation is one of the most common preparer errors.
For corporations, check ownership-change history before you file anything. If a Section 382 event occurred, the amount of NOL you can actually apply, in either direction, may be far lower than the number on your books.
Two quick scenarios illustrate this. A farmer who paid substantial tax two years ago and just had a bad crop year almost always benefits from the carryback: the refund arrives in weeks rather than years, and there’s little upside to waiting. A corporation that lost money last year but also went through a recent ownership change needs a Section 382 analysis before assuming any of that loss, carried back or forward, is usable at all.
How Do You File a NOL Carryback Claim?
Filing mechanics differ sharply depending on whether you’re an individual, an estate or trust, or a corporation, and picking the wrong form can add months to getting your refund.
For individuals, estates, and trusts, you have two paths. Form 1045, the Application for Tentative Refund, is the faster route. The IRS generally acts on a properly filed Form 1045 within 90 days, which makes it the preferred option whenever the carryback year and computations are straightforward. The tradeoff is a strict deadline: Form 1045 must be filed within 12 months after the end of the tax year in which the NOL arose. Miss that window, and your only remaining option is Form 1040-X, an amended return, which carries no comparable fast-track processing time and can take considerably longer for the IRS to work through, though it remains available for a longer period after the loss year closes.
For corporations, the equivalent tentative-refund vehicle is Form 1139, which carries the same 90-day IRS processing expectation and the same 12-month filing deadline from the end of the NOL year. If a corporation misses that deadline, it must instead file Form 1120-X to amend the original return for the carryback year, again with a slower, non-expedited timeline. The instructions for Form 1139 detail the special carryback windows that still apply to farming and insurance-company losses, and they lay out exactly which schedules a corporation needs to attach.
Form 172 is where noncorporate taxpayers, individuals, estates, and trusts, actually compute the NOL amount available to carry back or forward. It replaced the older worksheets formerly embedded in Publication 536 and now serves as the standalone computation form referenced by both Form 1045 and Form 1040-X.
The 90-day processing window on Forms 1045 and 1139 is a meaningful advantage over amended returns, but it comes with a catch: the IRS can still examine and adjust a tentative refund after paying it, so a fast refund isn’t the same as a closed file.
Whichever form you use, your filing needs to include:
- A completed Form 172 (noncorporate) or the corporate equivalent computation showing how the NOL was figured.
- A worksheet showing the 80% limitation calculation, if applicable, broken out by year.
- A statement identifying which years the loss is being carried to and in what order, when multiple NOLs are involved.
- Copies of the original return(s) for the carryback year, if filing Form 1040-X or Form 1120-X.
- Documentation supporting the loss itself: income statements, Schedule C or Schedule F details, or corporate books showing the loss year’s numbers.
Skipping the worksheet is the single most common reason the IRS sends a follow-up notice on an otherwise valid carryback claim. Attach it even when the math seems obvious to you.
How Do You Calculate the 80% Taxable Income Limitation?
The 80% limitation only applies to NOLs arising in tax years beginning after December 31, 2017, and it caps how much of your current year’s taxable income those post-2017 losses can offset, not how much you can carry forward. Understanding that distinction prevents the most common calculation error.
Here’s the sequence that actually applies:
- Step one: Calculate taxable income for the year you’re applying the NOL against, computed before deducting any NOL.
- Step two: Multiply that number by 80% to get your cap for post-2017 NOL usage in that year.
- Step three: Apply any pre-2018 NOLs first, with no percentage limitation, since those retain the old unlimited-offset treatment.
- Step four: Apply post-2017 NOLs against the remaining taxable income, up to the 80% cap calculated in step two.
- Step five: Any unused post-2017 NOL carries forward indefinitely; it never expires under current law.
The reason pre-2018 and post-2017 losses need to be tracked separately isn’t bureaucratic pedantry, it’s because they genuinely receive different treatment under the same return. A business carrying both types of losses forward needs to maintain a running schedule showing the origin year of each NOL component, because applying them in the wrong order, or lumping them together, can understate how much loss is actually usable in a given year.
Two errors show up constantly on returns that later draw IRS scrutiny. The first is using adjusted gross income instead of taxable income (computed before the NOL deduction) as the base for the 80% calculation, which produces the wrong cap entirely. The second is failing to attach a worksheet showing the year-by-year computation, leaving the IRS to guess how you arrived at your number, which is exactly the kind of gap that turns a routine carryforward into a correspondence audit.
Pro Tip: Keep pre-2018 and post-2017 NOLs on two separate lines in your carryforward schedule every single year, even after the pre-2018 balance is exhausted. Preparers who merge them into one running total almost always miscalculate the 80% cap the following year.
What Triggers an IRS Review of a Carryback Claim?
Filing a Form 1045 or Form 1139 doesn’t close the book, it opens a window. The IRS can, and routinely does, examine a tentative refund claim after issuing the check, which means the documentation you attach at filing is really your first line of audit defense, not paperwork for its own sake.
A few things reliably draw attention. Carrying a loss back into a year that suddenly triggers AMT liability is one, particularly when the taxpayer didn’t refigure the carryback year’s full return and simply subtracted the NOL from the original tax bill. Refundable credits computed in the carryback year, things like certain business credits, can also shift once taxable income drops, and the IRS checks whether those were recalculated correctly. For corporations, an ownership change that wasn’t disclosed or accounted for under Section 382 is a near-guaranteed follow-up notice once the IRS cross-references shareholder filings against a large NOL claim.
The IRS also expects a clear paper trail: year-by-year worksheets showing how the NOL was computed, the Form 172 workpapers behind the numbers, and a clear statement attached to any amended return explaining exactly what’s being claimed and why. Missing any of the following tends to slow down or flag a claim:
- A worksheet reconciling the loss year’s numbers to the amount actually carried.
- Documentation of any prior elections, including a prior waiver of carryback rights.
- Evidence that AMT and refundable credits were recalculated for the carryback year, not just the regular tax.
- A statement addressing any known ownership change, if the taxpayer is a corporation.
None of this makes carrybacks risky to claim. It makes them worth claiming carefully, with the kind of documentation that survives a second look. For a deeper walkthrough of the recordkeeping the IRS expects during examinations generally, our guide to documentation in IRS audits covers what to keep and for how long.
When Should You Bring in a Tax Resolution Specialist?
Some NOL situations are straightforward enough to handle with a good preparer and a checklist. Others are not, and knowing the difference early saves both money and stress.
A few signals mean it’s time to get a specialist involved rather than push forward alone. Multi-year corporate NOLs spanning several tax law regimes, pre-2018, the 2018-2020 window, and post-2020, are hard to sequence correctly without someone who tracks the ordering rules daily. Any recent or pending ownership change at a corporation with a significant NOL carryforward needs a Section 382 analysis before you file anything, because the number you think you have available may not be the number the law allows. Suspected AMT exposure in a carryback year is another clear trigger: if you’re not confident the carryback year’s full return was refigured correctly, that uncertainty alone justifies a second set of eyes. And if the IRS has already sent correspondence questioning a carryback you filed, that’s no longer a do-it-yourself situation.
Tax resolution specialists with extensive experience handle IRS matters, from reconstructing prior-year returns to preparing Form 1045, Form 1139, and Form 1040-X filings, to representing taxpayers directly when the IRS pushes back on a carryback claim. That kind of IRS representation matters most exactly when a claim has already drawn scrutiny or when the underlying facts, an ownership change, a mix of loss years, a farming and nonfarming split, are complicated enough that a mistake becomes expensive. If your issue involves unfiled returns from the loss years themselves, that needs to get resolved before any carryback claim can move forward at all, which is its own federal tax return matter worth addressing head-on.
The Part Most Guides Get Wrong About Carrybacks
The conventional advice treats NOL carrybacks like a simple yes-or-no question: are you allowed to do it, and if so, file the form. That framing misses where the real risk sits. The statutory eligibility question is usually the easy part. What actually determines whether a carryback helps or hurts is the interaction effects, AMT recalculation in the carryback year, Section 382 limitations nobody checked, pre-2018 and post-2017 NOLs mixed into one schedule.
I’d push back on the instinct to grab the fastest refund available. A five-year-old carryback year with a hidden AMT problem can hand back less than expected, sometimes far less. The smarter first move is always reconstructing the full carryback-year return before deciding anything, not after filing Form 1045. That single step, done properly, prevents most of the correspondence audits I see follow a carryback claim. Get the sequencing right before you get the refund fast.
— Joe
How Taxproblem Helps With NOL Carryback and Carryforward Issues
Professional tax resolution services are available for readers who have already sorted through the rules above and hit a wall, whether that’s a multi-year NOL sequence that needs untangling, an ownership change that might limit what you can claim, or an IRS notice questioning a carryback you already filed. Instead of guessing at Form 172 computations or hoping a Form 1139 gets processed cleanly, you can get expert help with prior-year returns and dealing directly with the IRS when claims go sideways.
A free evaluation starts with a documentation review: the loss-year return, any prior elections, ownership records if a corporation is involved, and whatever correspondence the IRS has already sent. From there, Joe Mastriano, CPA, can determine whether Form 1045, Form 1139, or an amended return is the right vehicle, and whether an Offer in Compromise or another resolution path makes sense if the carryback is tied to a larger IRS balance. If you’re ready to get a straight answer on your specific NOL situation, start with a free evaluation of your IRS case and find out exactly where you stand before the deadline on your carryback window closes.
Sources
The rules covered above rest on a small set of authoritative documents worth bookmarking if you’re handling a carryback yourself or reviewing a preparer’s work.
- Instructions for Form 172 (Internal Revenue Service)
- 26 U.S.C. § 172 – Net operating loss deduction (Cornell LII)
The IRS forms and publications above are procedural: they tell you how to compute and file. The statutory text at 26 U.S.C. § 172 is the underlying law those forms implement.
This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.
FAQ
Can a net operating loss be carried back?
Generally, no, for losses arising after 2020. The main exceptions are farming losses, which retain a two-year carryback, and certain insurance-company losses under specialized rules.
What is the 80% rule for NOL?
For NOLs arising in tax years after December 31, 2017, the loss can offset only up to 80% of the current year’s taxable income, computed before the NOL deduction, with any unused amount carried forward indefinitely.
What is a net operating loss carryover?
An NOL carryover is the unused portion of a net operating loss that a taxpayer applies to a later tax year’s taxable income, calculated on Form 172 for individuals, estates, and trusts, and tracked separately from any farming-loss carryback amounts.