Figures: tax year 2026
A net operating loss (NOL) arises when allowable deductions exceed gross income, after the required tax adjustments. To calculate potential tax savings, the corporation identifies each loss's character, origin year, remaining balance and permitted utilization period.
The operating-loss vintage rules preserve the temporary five-year carryback for losses arising in tax years beginning in 2018 through 2020. A remaining carryforward from that period still faces the applicable 80% limit when used in the current testing year.
Capital loss carryovers reduce eligible capital gains before the operating-loss deduction base is determined. Older operating losses then reduce that base before the 80% limitation applies to later operating losses.
- Determine taxable income before loss deductions, retaining capital-gain character.
- Deduct usable capital loss carryovers against capital gains.
- Deduct available pre-2018 operating losses against the remaining eligible income.
- Limit later operating losses to the lesser of their available balance or 80% of the remaining base.
- Compute tax and reconcile each ending loss balance separately.
Common mistakes
- Wrong operating-loss base. In Example 1, ignores the older loss already used; the supported later deduction is $240,000.
- Comparing state tax alone. Cedar saves against Birch before the federal deduction interaction, but the combined saving is $5,688.
- Discounting tax alone. In Example 5, incorrectly leaves delayed revenue undiscounted; the supported present value is $68,400.
Bottom line
- Capital loss carryovers offset capital gains before the operating-loss deduction base is calculated.
- Pre-2018 operating losses retain their 20-year carryforward; later operating losses generally face an 80% utilization limit and carry forward indefinitely.
- Expansion comparisons combine nexus, income classification, sourcing, factor weights and federal deduction effects across every affected jurisdiction.
- Timing decisions compare legally feasible recognition dates and the present values of actual after-tax cash flows.
Exam shortcut
Start a loss problem with three separate columns: vintage, eligible income and expiration. Net capital gains before applying the later operating-loss limitation. For a location question, classify income before choosing a factor. Mark receipts subject to throwback or throwout, then total every affected state's tax. Put each commercial payment and its tax effect on the same timeline. Check whether a stated rate is current law or a hypothetical sensitivity input.
The full lesson (about 8,172 words, 54 min read) adds 13 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.B1
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