Figures: tax year 2026
A net operating loss (NOL) is the excess of allowable deductions over gross income after the required tax modifications. A C corporation separately tracks its net capital loss, the excess of capital losses over capital gains, because that loss has different utilization rules.
A carryforward moves an unused loss into a later tax year; a carryback applies it to an earlier year. Each loss retains its originating year, which determines its applicable limits, utilization order, and remaining life.
The ordinary corporate rules differ by loss type and vintage:
The following exceptions qualify the general NOL carryback rules:
- Losses arising in tax years beginning in 2018 through 2020 generally received a five-year carryback, unless validly waived or otherwise restricted.
- A qualifying farming-loss portion generally has a two-year carryback, which can be waived; its newer-loss carryforward remains subject to the applicable income ceiling.
- Nonlife insurance companies generally retain a two-year carryback and twenty-year carryforward, without the 80% limitation.
Common mistakes
- Adding back the DRD. Omitting Alder's $65,000 deduction understates its NOL at $50,000 instead of $115,000.
- Using the unreduced ceiling base. In Briar's mixed case, $30,000 + 80% x $100,000 = $110,000 incorrectly applies the newer-loss ceiling before subtracting older losses.
- Treating capacity as loss. Cedar's unused $8,000 increases next year's limitation; it does not increase the $488,000 remaining NOL.
Bottom line
- Current NOL formation excludes earlier NOL deductions and cannot be enlarged by a capital-loss carryback.
- A qualifying DRD can create or increase an NOL when the taxable-income limitation exception applies.
- Eligible pre-2018 NOLs precede newer losses and retain their twenty-year carryforward life.
- Ordinary post-2017 NOL carryforwards are indefinite and generally face an 80% ceiling on the statutory base remaining after older NOLs.
Exam shortcut
Identify whether the question asks for loss creation, current deduction, or ending balance. Place operating and capital losses in separate columns before calculating. Mark every NOL's originating vintage. In a mixed pool, write the older-loss subtraction before entering the 80% multiplication. For an ownership change, separate the percentage-point test, entire equity value, day count, income allocation, and available loss. Compare the applicable caps only after calculating each independently.
The full lesson (about 4,794 words, 32 min read) adds 6 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- II.A1
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