Net Operate Loss Deductions for Businesses
Business losses can provide tax relief through the net operating loss (NOL) deduction, allowing companies to reduce taxable income in future years. To qualify for this deduction, a business’s deductions must exceed its income, typically resulting from business operations, casualty or theft losses from federally declared disasters, or rental property losses. However, certain items, such as excess capital losses, nonbusiness deductions, and the NOL deduction itself, are generally excluded from NOL calculations. While individuals and C corporations can claim the deduction, partnerships and S corporations usually do not qualify, although their partners and shareholders can calculate NOLs based on their shares.
Changes from the Tax Cuts and Jobs Act (TCJA) have significantly impacted the rules surrounding NOLs. Carrybacks are now eliminated for most businesses, carryforwards are allowed indefinitely, and deductions are limited to 80% of taxable income for the year. Additionally, the TCJA introduced a limitation on excess business losses, which restricts non-corporate taxpayers from using business losses to offset income beyond a certain threshold. For 2025, this threshold is set at $313,000 for single filers and $626,000 for married couples filing jointly, with unused losses carried forward. Understanding these provisions is essential for effective tax planning.
