Net Operating Loss (NOL)

A Net Operating Loss (NOL) occurs when your allowable business deductions exceed your gross income for the tax year. NOLs most commonly arise from operating losses in a trade or business, casualty and theft losses, or rental real estate losses. Understanding NOL rules is critical for EA exam success because the rules changed significantly under the Tax Cuts and Jobs Act (TCJA).

What Creates an NOL?

An NOL typically results from:

• Business losses (Schedule C, F, or partnership/S corporation losses)
• Casualty and theft losses from federally declared disasters
• Employee business expenses (before 2018)
• Rental real estate losses (subject to passive activity rules)
• Moving expenses for active-duty military

Key concept: An NOL is NOT simply a negative taxable income figure. You must make specific adjustments to convert negative taxable income into the actual NOL amount.

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Pre-TCJA vs. Post-TCJA NOL Rules

The Tax Cuts and Jobs Act (TCJA) fundamentally changed NOL rules for losses arising in tax years beginning after December 31, 2017. This is a critical distinction for the EA exam.

Important timing rule: The rules that apply depend on when the NOL arose, not when it is used. An NOL from 2017 uses pre-TCJA rules even if carried forward to 2024.

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The 80% Taxable Income Limitation

For NOLs arising after 2017 and carried forward to tax years after 2020, your NOL deduction cannot exceed 80% of taxable income (computed without the NOL deduction, QBI deduction, or Section 250 deductions).

Calculating the 80% Limitation

Step 1: Calculate taxable income without the NOL deduction, QBI deduction, or Section 250 deduction

Step 2: Multiply this amount by 80%

Step 3: Your NOL deduction is limited to the lesser of:

• Your available NOL carryforward, OR
• 80% of taxable income from Step 2

Example: In 2024, taxpayer has $100,000 taxable income (before NOL deduction) and $90,000 of NOL carryforward from 2023.

• 80% limitation: $100,000 x 80% = $80,000
• NOL deduction allowed: $80,000 (limited by 80% rule)
• Remaining NOL carryforward: $90,000 - $80,000 = $10,000 (carries to 2025)

Exception: Pre-2018 NOLs

NOLs arising before 2018 are NOT subject to the 80% limitation when carried forward. They can offset 100% of taxable income.

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Farming Loss Exception

Farming losses are the primary exception to the no-carryback rule. A farming loss is the smaller of:

• The NOL attributable to farming business operations, OR
• The total NOL for the year

Farming Loss Rules (2024)

What qualifies as farming? A farming business includes:

• Cultivation of land for crop production
• Raising or harvesting agricultural or horticultural commodities
• Operating a nursery or sod farm
• Raising, shearing, feeding, or managing animals

Not farming: Contract harvesting for others or buying/selling products grown by others.

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Calculating the NOL: Form 172

Beginning in 2024, use Form 172 to calculate your NOL. The form walks through the adjustments needed to convert negative taxable income into the actual NOL amount.

Items NOT Allowed When Calculating NOL

When figuring your NOL, certain deductions must be added back because they are not business-related or represent separate limitations:

NOL Calculation Steps

Step 1: Start with your negative AGI or negative taxable income

Step 2: Add back the standard deduction (or itemized deductions)

Step 3: Add back capital losses exceeding capital gains (net capital loss limited to $3,000 cannot contribute to NOL)

Step 4: Add back nonbusiness deductions (alimony paid, IRA contributions, most itemized deductions) that exceed nonbusiness income (interest, dividends, nonbusiness capital gains)

Step 5: Add back any NOL deduction from prior years

Step 6: The result is your NOL for the current year

Simplified Example

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Excess Business Loss Limitation (Section 461(l))

Before an NOL can even be claimed, noncorporate taxpayers must apply the excess business loss limitation. For 2024, business losses exceeding $305,000 (single) or $610,000 (MFJ) cannot offset nonbusiness income in the current year.

How It Works

Step 1: Calculate total business deductions

Step 2: Calculate total business income plus the threshold amount

Step 3: If business deductions exceed the amount from Step 2, the excess is disallowed in the current year

Step 4: The disallowed excess business loss becomes an NOL carryforward to the next year

Example (2024): A single taxpayer has $500,000 in business losses and $50,000 in business income.

• Threshold: $50,000 + $305,000 = $355,000
• Excess business loss: $500,000 - $355,000 = $145,000 disallowed
• The $145,000 becomes an NOL carryforward to 2025, subject to the 80% rule

Historical Threshold Amounts

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Ordering Rules: Using NOL Carryforwards

When you have NOLs from multiple years, apply them in chronological order (oldest first - FIFO method).

Multi-Year NOL Example

A taxpayer has:

• 2022 NOL: $40,000
• 2023 NOL: $60,000
• 2024 taxable income (before NOL): $100,000

Application (80% rule applies):

The $40,000 from 2022 is used entirely, and $40,000 of the 2023 NOL is used. The remaining $20,000 from 2023 carries forward to 2025.

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Claiming the NOL Deduction

Form 1045 vs. Form 1040-X

If you have a farming loss and elect to carry it back, you have two options:

Important: Starting in 2024, Form 1045 no longer includes Schedules A and B. Use Form 172 to calculate the NOL, then enter the result on Form 1045.

Carryforward (Most Common for 2024)

Since most NOLs cannot be carried back, you will typically carry the NOL forward by:

1. Reporting the NOL deduction on Schedule 1, Line 8a
2. Attaching a statement showing how you calculated the 80% limitation
3. Tracking remaining carryforwards for future years

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Key Forms for NOL

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CARES Act Provisions (Historical Context)

The CARES Act (2020) provided temporary relief for NOLs arising in 2018, 2019, and 2020:

• Allowed 5-year carryback
• Suspended the 80% limitation through 2020

Important for EA exam: These provisions have expired. For NOLs arising in 2021 and later, the standard post-TCJA rules apply (no carryback except farming, 80% limitation).

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Summary: NOL Rules for 2024

EA Exam Tip: Questions often test the distinction between pre-TCJA and post-TCJA rules, the 80% limitation calculation, and the farming loss exception. Remember that the date the NOL arose determines which rules apply.