NOL Carryforward
The ability to apply a net operating loss from one year against taxable income in future tax years.
What is NOL Carryforward?
A net operating loss (NOL) carryforward allows a business or individual to apply a tax year's NOL—the amount by which allowable deductions exceed gross income—against taxable income in future years to reduce future tax liability. Under rules enacted by the Tax Cuts and Jobs Act of 2017, NOLs generated after December 31, 2017 may be carried forward indefinitely but can offset only up to 80% of taxable income in any single year. Pre-2018 NOLs follow older rules allowing full offset within a 20-year window. The ability to carry back NOLs to prior years was generally eliminated for non-farming businesses.
Example
A startup incurs an NOL of $500,000 in Year 1 due to heavy R&D spending. In Year 2, the company earns $800,000 in taxable income. It applies the $500,000 NOL carryforward to offset up to 80% of Year 2 income ($640,000), reducing taxable income from $800,000 to $300,000 and saving approximately $42,000 in corporate tax at the 21% rate.