What Is the Net Operating Loss Deduction?

A net operating loss (NOL) occurs when your business's allowable tax deductions exceed your income for the year — for individuals, this typically happens with large business losses or major casualty deductions that wipe out all other income. The tax code allows you to carry forward an NOL to future profitable years to reduce your taxable income in those years, subject to a limitation of 80% of taxable income in any single year. Under current law (post-2017), NOL carrybacks are generally not allowed for most businesses, though farmers and certain insurance companies have special carryback provisions, and Congress has allowed carrybacks during economic crises like COVID-19. NOLs can be carried forward indefinitely, so a large loss year doesn't permanently cost you the deduction — it just means you'll eventually use it in a future profitable year. Understanding how NOLs work is especially important for startup founders, real estate investors in losing years, and small business owners navigating financial downturns.