8024 / Did tax reform impact the net operating loss (NOL) carryforward and carryback rules for taxpayers that are not corporations?

Editor’s Note: The CARES Act modified the NOL rules in response to the COVID-19 pandemic. Generally, the CARES Act amended the excess business loss rules discussed below to delay the effective date until January 1, 2021. The 80 percent income limitation was also lifted, see Q 8051.

Under the 2017 tax reform legislation, excess business losses (see below) of a non-corporate taxpayer are not allowed for the taxable year. These losses are carried forward and treated as part of the taxpayer’s net operating loss (“NOL”) carryforward in subsequent taxable years.¹

NOL carryovers generally are allowed for a taxable year up to the lesser of the carryover amount or 80 percent of taxable income determined without regard to the deduction for NOLs.

An “excess business loss” is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The annual threshold amount is $250,000 (or twice the otherwise applicable threshold amount for married taxpayers filing a joint return). This amount is indexed for inflation ($313,000 in 2025, $305,000 in 2024 and $289,000 in 2023).² The CARES Act clarified that excess business loss is treated as NOL in subsequent tax years for carryback or carryforward purposes and the 2025 OBBB made this treatment permanent. Further excess business loss is computed without including the NOL or available deduction under Section 199A.³ W-2 wages are also excluded from the calculation.⁴

In the case of a pass-through entity (such as a partnership or S corporation), these rules apply at the partner or shareholder level. Each partner’s distributive share and each S corporation shareholder’s pro rata share of items of income, gain, deduction, or loss of the partnership or S corporation are taken into account in applying the limitation for the taxable year of the partner or S corporation shareholder.⁵ These rules apply after the application of the passive loss rules.⁶

These provisions are effective for tax years beginning after December 31, 2017.

For taxable years beginning after December 31, 2017 and before January 1, 2026, the limitation relating to excess farm losses does not apply.