Tax Tip Tuesday: NOL Carryforward Basics
A net operating loss (NOL) lets you carry a loss year forward to lower a future tax bill. The basic rule is the same for every taxpayer, but if you have foreign income, the loss can interact with your return a little differently. Here's the simple version.
The Basics (Applies to Everyone)
● No carryback. An NOL from 2018 or later can only be carried forward, not back to a prior year.
● No expiration. Unused NOLs carry forward indefinitely.
● 80% cap. In any year you use it, an NOL can only offset up to 80% of that year's taxable income — not the whole thing.
So if your business has a loss this year, you don't lose it. It sits on the books and reduces future tax bills, 80% at a time, for as long as it takes to use up.
Quick example: Say your business has a $50,000 NOL carryforward, and next year it earns $40,000 in taxable income. The 80% cap means you can only use $32,000 of the NOL that year, so you'll still owe tax on the remaining $8,000. The other $18,000 of the NOL keeps carrying forward to future years.
This is why NOLs rarely disappear in one shot for a growing business, the 80% cap stretches them out, sometimes over several years. It's also why it pays to track your remaining NOL balance every year rather than estimating it at filing time: a small tracking error compounds the longer the carryforward sits on the books.
How It Changes for International Returns
The NOL rule itself doesn't change. But if you're a U.S. shareholder in a foreign company (a CFC), there are a few things worth knowing:
● Your NOL can also offset foreign income picked up on your return, like GILTI or Subpart F income. That sounds helpful, but it can end up wasting foreign tax credits tied to that income, since those credits generally can't be carried forward if unused.
● A loss inside the foreign company itself is not the same as a U.S. NOL. It doesn't carry forward the same way, so a bad year abroad doesn't automatically build up a loss you can use later.
● If a foreign branch (rather than a foreign corporation) is involved, a separate set of rules can limit how a branch loss offsets your other U.S. income. Worth a quick check if that applies to you.
None of these changes how the domestic NOL math works. They just mean the loss can end up interacting with a part of the return most domestic-only businesses never have to think about.
Don't Forget State Rules Can Differ
Everything above is federal. Many states, including California, don't automatically follow the federal NOL rules, some use their own carryforward periods, some allow carrybacks the federal rules no longer permit, and some apply a different percentage limitation (or none at all). A federal NOL and a state NOL for the same loss year can carry forward on completely different timelines, so they need to be tracked separately, not assumed to match.
If your business is purely domestic, the NOL rules are simple: carry it forward, apply the 80% cap, done. If foreign income is part of the picture, or you operate in a state with its own NOL rules, it's worth a quick check before you file, using the NOL in the wrong place, or assuming state and federal carryforwards match, can cost you money you can't get back. It's a five-minute conversation now versus a permanent loss later.
Have a loss carryforward and foreign income on the same return — let's take a quick look before you file. Reach out to us at info@mkhstaxgroup.com.
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