Net operating losses (NOLs) are tax attributes that allow businesses to use losses in one year to offset taxable income in other years. Under current federal law, the rules were reshaped by the Tax Cuts and Jobs Act of 2017 and temporarily modified by the CARES Act of 2020. The result is that most NOLs arising in tax years beginning after 2020 can be carried forward indefinitely but are limited in application to 80 percent of taxable income for the carryforward year. Authoritative guidance from Molly F. Sherlock, Congressional Research Service, summarizes these legislative changes and their timeline, and practical filing guidance is available from the Internal Revenue Service in Publication 536.
How current federal rules work
For NOLs originating after 2017 and after the temporary CARES Act adjustments expire, taxpayers may not carry NOLs back (with narrow exceptions) and may carry them forward indefinitely. When applied against taxable income in a later year, the deduction from carryforwards is subject to the 80 percent limitation, meaning a taxpayer cannot use NOLs to reduce taxable income below 20 percent of its otherwise computed taxable income. The CARES Act drew back some of these limits for 2018–2020 by allowing five-year carrybacks and removing the 80 percent cap for those years, creating refunds for some firms; Molly F. Sherlock, Congressional Research Service, provides a concise legislative history of those temporary provisions.
Consequences, relevance, and regional nuance
The carryforward regime affects liquidity and behavior. For growing firms and startups, indefinite carryforwards preserve future tax relief, but the 80 percent cap can leave some taxable exposure that affects hiring and investment decisions. For firms in regions with industry-specific downturns—such as manufacturing hubs or energy-producing territories—NOL rules shape recovery patterns; states often diverge from federal rules, with many disallowing indefinite carryforwards or imposing time limits, which creates territorial disparities in after-tax recoveries. The Internal Revenue Service, Publication 536, explains federal mechanics and filing details, while state revenue agencies provide local variations.
Understanding NOL carryforwards is essential for financial planning, estimating deferred tax assets, and anticipating cash flow from potential refunds. Because legislation can change and state rules vary, consult the Congressional Research Service analysis by Molly F. Sherlock and IRS Publication 536 for authoritative, up-to-date explanations, and consider professional tax advice for specific situations.