A loss carryforward is a tax provision that allows a taxpayer to apply a loss from one tax year to future tax years to reduce taxable income and potentially lower future tax bills.
Loss carryforwards most commonly arise from:
- Net Operating Losses (NOLs), and
- Capital losses
✅ Key Points
👤 Who Can Use a Loss Carryforward?
- Businesses and self‑employed individuals (for Net Operating Losses)
- Individual taxpayers (for capital losses)
📉 Types of Losses That Can Be Carried Forward
Net Operating Losses (NOLs)
- Occur when allowable business deductions exceed taxable income
- Common for:
- Sole proprietors
- Partnerships
- S corporations
- Carryforward period:
- ✅ Indefinite
- ⚠️ Limited to 80% of taxable income in each future year (for NOLs arising in tax years after 2017)
Capital Losses
- Occur when investment losses exceed capital gains
- For individuals:
- ✅ Up to $3,000 per year ($1,500 if Married Filing Separately) can offset ordinary income
- ✅ Any remaining loss is carried forward indefinitely until fully used
🔄 How a Loss Carryforward Works
- The loss is calculated and reported in the year it occurs
- Any unused portion is carried forward
- The carryforward is applied against income in future years, subject to annual limits
- The process continues until the loss is fully used
📌 Example: Net Operating Loss Carryforward
A self‑employed taxpayer reports a $20,000 Net Operating Loss in 2024.
In 2025, they have $15,000 of taxable income.
- Maximum NOL usable in 2025:
80% × $15,000 = $12,000 - Taxable income after NOL:
$15,000 − $12,000 = $3,000 - Remaining NOL to carry forward:
$8,000
✅ The remaining $8,000 can be carried forward to 2026 and later years.
⚠️ Important Notes
- NOLs can no longer be carried back in most cases (post‑2017 law), with limited exceptions
- Capital loss carryforwards:
- Do not expire
- Must be applied each year, even if only partially usable
- Loss carryforwards may be limited or affected by:
- Basis limitations
- At‑risk rules
- Passive activity loss rules