Net Operating Loss (NOL)

You book an NOL when the year's deductions exceed the year's income. Since the 2017 tax law, that loss never expires, so it sits on your return waiting for a profitable year. The catch is the 80% rule: in any year you apply a post-2017 NOL, it can erase only 80% of that year's taxable income, not all of it. You will pay tax on the remaining 20% even with losses stacked up. Carrybacks are gone for almost everyone, the exception being farming losses, which still ride back two years.

Where do these losses come from? Usually the first year or two of a business, a heavy expansion, or a year you front-loaded depreciation. Big equipment purchases plus bonus depreciation can manufacture a paper loss while cash flow looks fine. That loss is real for tax purposes and it carries.

Pass-throughs are where it gets sharp. The loss doesn't sit at the entity, it flows through to your personal return, and there it hits the excess business loss limit under section 461(l). For 2026 that cap is $256,000 if you're single and $512,000 married filing jointly. The July 2025 OBBBA reset those numbers down from 2025's $313,000 and $626,000 and made the limit permanent, so don't expect the old, higher thresholds back.

Here's the mechanic that trips people up. Say you're married and post a $700,000 business loss. You can deduct $512,000 against your other income this year; the remaining $188,000 doesn't vanish, it converts into an NOL that carries forward and then runs into the 80% wall in every future year you use it. So a single bad year can take three or four good years to fully absorb.

Timing is your lever. Pull deductions into a loss year and you deepen a loss you can't fully use; push income into it and you waste shelter. The win is usually the opposite, spreading deductions so each year's loss stays under the 461(l) cap and the carryforward chews through profits at the full 80% rather than getting stranded. Run the multi-year math before you accelerate anything.