NOL 80% Offset Rule - How Does It Apply for Combined CarryOver and Current Year Expenses?

The 80% taxable income limitation only applies to Net Operating Loss (NOL) carryovers from years beginning after December 31, 2017. It doesn't apply to your current year business expenses or losses. Those current year expenses reduce your income dollar-for-dollar before the NOL carryover even comes into play. Here's how it would work in your situation: First, calculate your current year taxable income by subtracting your $8,200 in current year business expenses from your $63,400 profit. This gives you $55,200. Then, you can use your NOL carryover to offset up to 80% of that $55,200, which would be $44,160 maximum. Since your carryover is $42,000, you can use all of it since it's less than the 80% limit. Your final taxable income would be $13,200 ($55,200 - $42,000).

Just wanted to share my experience with NOLs since I was in a similar situation last year. I found a great tool called taxr.ai (https://taxr.ai) that helped me navigate this exact NOL carryover issue. After struggling with the 80% limitation rules and getting different answers from various accountants, I uploaded my previous returns and it analyzed my NOL situation perfectly. The software correctly separated my pre-2018 NOLs (which can offset 100% of income) from my post-2017 NOLs (subject to the 80% limitation). It also properly handled my current year business expenses before applying the NOL limitations. Saved me a ton of headache trying to manually calculate everything!

I was initially worried about the tool handling those complex NOL provisions from the CARES Act since my accountant had totally missed them. I decided to try taxr.ai (after seeing the recommendation here) and wow - it actually found I could carry back some losses from 2019 that my accountant had only carried forward! It correctly identified which portions of my NOLs were subject to the 80% limitation and which weren't. The analysis even flagged that I should file an amended return for 2018 because my previous accountant had applied the 80% limitation incorrectly during that transitional period. Looking at a potential $3,700 refund now! The current year vs. carryover distinction was clearly explained in the report it generated.

For anyone struggling with getting help about NOLs from the IRS - I feel your pain! I spent WEEKS trying to get through to someone who actually understood the NOL carryover rules after the tax law changes. I finally used Claimyr (https://claimyr.com) to get through to an IRS agent who specialized in business tax issues. You can see how it works here: https://youtu.be/_kiP6q8DX5c After multiple failed attempts calling directly, Claimyr got me connected in about 25 minutes. The agent I spoke with clarified exactly how the 80% limitation works with current year losses versus carryovers - totally consistent with what the first commenter explained. They even sent me specific IRS publications about NOL calculations that I wasn't able to find on my own.

I need to eat my words. After my skeptical comment, I decided to try Claimyr as a last resort since I was getting nowhere with the IRS directly about my NOL issues. I was honestly shocked when I got a call back in about 40 minutes connecting me to an actual IRS business tax specialist. The agent was able to pull up my records and confirm exactly how my NOL carryovers should be calculated with the 80% limitation. He even explained a special provision I didn't know about for small businesses that might apply to my situation! Saved me from potentially making a $7,900 error on my return. I still can't believe I got through when I'd previously spent hours upon hours getting disconnected or waiting on hold. Totally changed my mind about the service.

One thing nobody's mentioned yet - the rules for NOLs have changed several times in recent years! The Tax Cuts and Jobs Act (TCJA) initially eliminated NOL carrybacks and implemented the 80% limitation starting in 2018. Then the CARES Act temporarily suspended the 80% limitation for tax years 2018-2020 and allowed 5-year carrybacks. Now we're back to the TCJA rules with the 80% limitation. Just make sure you're applying the right rules based on when your losses occurred. Pre-2018 NOLs follow the old rules (can offset 100% of income), while post-2020 NOLs are subject to the 80% limitation with no carryback option.

Has anyone used the IRS's worksheet for calculating NOLs with the 80% limitation? I found it super confusing because there seem to be different versions and some don't clearly address how to handle current year expenses vs. carryover amounts.

The IRS worksheets can definitely be confusing! I've been dealing with NOL calculations for my consulting business for several years now. What helped me was understanding that the calculation happens in stages: 1) Calculate your current year taxable income INCLUDING all current year business expenses and deductions 2) Apply the 80% limitation to that final taxable income amount 3) Use your NOL carryovers up to that 80% limit The tricky part is that different tax years' NOLs follow different rules. My 2017 NOLs can offset 100% of income, but my 2021+ NOLs are limited to 80%. I keep a simple tracking spreadsheet that shows each year's NOL balance and which limitation applies. One thing that caught me off guard - if you have NOLs from multiple years, you generally have to use them in chronological order (oldest first). This can affect your tax planning since the older NOLs might have more favorable rules. @Paolo Ricci I'd actually love to see that spreadsheet you created if you're willing to share it! The IRS worksheets are really hard to follow.

Great question! I went through this exact situation with my freelance business last year. The key thing to understand is that the 80% limitation ONLY applies to NOL carryovers from previous years - not your current year business expenses. Here's how it works step by step: 1) Start with your business profit: $63,400 2) Subtract your current year business expenses: $63,400 - $8,200 = $55,200 3) This $55,200 is your taxable income before applying any NOL carryovers 4) Calculate 80% of that amount: $55,200 × 0.80 = $44,160 5) Since your NOL carryover ($42,000) is less than the 80% limit ($44,160), you can use the entire carryover 6) Final taxable income: $55,200 - $42,000 = $13,200 The confusion often comes from thinking the 80% applies to everything, but current year expenses reduce your income dollar-for-dollar before you even get to the NOL carryover calculation. Your tax software is probably calculating it correctly - it's treating current expenses as regular deductions and then applying the 80% rule only to the carryover portion. Hope this helps clarify things! The IRS Publication 536 has more detailed examples if you want to dive deeper into the calculations.

I've been dealing with NOL calculations for my small manufacturing business for the past few years, and I wanted to add a practical perspective to this discussion. What really helped me understand the 80% rule was thinking of it as two completely separate calculations that happen in sequence. First, you calculate your "regular" taxable income for the current year - this includes ALL your current year income and expenses, just like you would for any normal tax return. Current year business expenses, depreciation, Section 179 deductions, etc. all reduce your income dollar-for-dollar at this stage. Only AFTER you have that final current-year taxable income number do you then look at using NOL carryovers. And it's only at this second stage where the 80% limitation comes into play. I think the confusion happens because people hear "80% limitation on NOLs" and assume it means you can only deduct 80% of your total losses. But that's not right - it means NOL *carryovers* can only offset up to 80% of your current year's taxable income. In your case, Fatima, your current year expenses of $8,200 are treated just like any other business deductions. They reduce your income from $63,400 to $55,200. Then, and only then, do you apply the 80% rule to see how much of your $42,000 carryover you can use against that $55,200. This distinction becomes really important for tax planning, especially if you're expecting fluctuating income in future years.

I've been following this discussion and wanted to share my experience as someone who's helped dozens of small business owners navigate NOL issues over the years. The explanations here are spot-on, but I'd add one practical tip that often gets overlooked. When you're doing year-end tax planning with NOL carryovers, consider the timing of your income and expenses carefully. Since current year expenses reduce your taxable income before the 80% NOL limitation kicks in, you might want to accelerate certain deductible expenses into the current year if you have large NOL carryovers waiting to be used. In Fatima's case, with $42,000 in carryovers and only being able to use up to 80% of taxable income ($44,160 maximum), she actually has some "headroom" this year. If she has any discretionary business expenses she was planning for early next year - equipment purchases, professional development, marketing costs - moving them into this tax year could actually be beneficial. It would reduce her current taxable income but still leave room to use her full NOL carryover. The key is finding that sweet spot where you maximize your NOL usage without leaving money on the table. Many business owners don't realize they have this flexibility in their tax planning when dealing with NOL carryovers.

This has been such an incredibly helpful thread! As a fellow small business owner who's been struggling with NOL calculations, I can't thank everyone enough for breaking this down so clearly. I've been making this way more complicated than it needs to be. The sequential approach that several people mentioned - first calculate regular taxable income with all current year expenses, THEN apply the 80% rule to carryovers - finally makes sense to me. I was getting confused trying to do everything at once. @Zoe Alexopoulos Your point about strategic expense timing is brilliant! I hadn't thought about using the "headroom" between my actual NOL carryover and the 80% limit to optimize current year deductions. I'm definitely going to review my Q4 expenses with this in mind. For anyone else following along, I think the key takeaway is that current year business expenses work exactly like they always have - they reduce your income dollar-for-dollar. The 80% limitation ONLY applies to NOL carryovers from previous years. Once I understood that distinction, everything else fell into place. Thanks again to everyone who shared their experiences and expertise. This community is amazing for getting real-world guidance on complex tax issues!

I've been a tax preparer for over 15 years and want to emphasize something that often gets missed in NOL discussions - the importance of maintaining detailed records for each loss year. With all the rule changes mentioned in this thread (TCJA, CARES Act, current rules), you need to track not just the amounts but also the tax year each NOL originated. I see clients who have NOLs spanning multiple years with different limitation rules, and without proper documentation, it becomes a nightmare to calculate correctly. For example, if you have NOLs from 2017 (100% offset allowed), 2019 (CARES Act rules), and 2022 (80% limitation), you need to apply them in chronological order but with their respective limitation rules. My recommendation: create a simple tracking sheet showing the original loss year, remaining balance, and which rules apply. This becomes crucial for multi-year tax planning and ensures you're maximizing the benefit of your more favorable pre-2021 NOLs before they expire. The IRS doesn't provide a great tracking mechanism for this, so you really need to stay on top of it yourself or work with someone who understands the nuances of these changing rules.

This entire discussion has been incredibly enlightening! I'm a small business owner who's been avoiding dealing with my NOL carryovers because I found the whole thing so confusing, but reading through everyone's explanations has finally made it click for me. The key insight that really helped was understanding that current year expenses are treated completely normally - they reduce your income dollar-for-dollar just like any other tax year. The 80% limitation ONLY applies when you're using NOL carryovers from previous years. I was making it way more complicated by trying to apply the 80% rule to everything. I particularly appreciate the practical advice about year-end planning and expense timing. I have about $28,000 in NOL carryovers from my startup years, and my business is finally profitable this year (around $45,000). Based on the calculations shown here, I should be able to use most or all of my carryover, but the strategic timing suggestions have me thinking about whether I should accelerate some equipment purchases I was planning for early next year. One question for the group - has anyone dealt with state NOL rules that differ significantly from federal? I'm in California and I've heard they have their own NOL limitations that don't necessarily match the federal rules. Would love to hear experiences from other states as well. Thanks to everyone who shared their knowledge here - this community is incredibly valuable for navigating these complex tax situations!

I've been following this thread closely as someone who deals with NOL issues regularly through my freelance consulting work. The explanations here have been excellent, and I wanted to add one more angle that hasn't been fully addressed yet - the interaction between NOLs and estimated tax payments. When you're carrying forward significant NOL amounts like Fatima's $42,000, it can really impact your quarterly estimated tax strategy. If you're expecting to use most or all of your NOL carryover in the current year, you might be able to reduce your estimated payments significantly compared to what you'd normally owe on your current year profit. In your case, Fatima, with $63,400 in profit minus $8,200 in current expenses = $55,200 taxable income before NOL. After using your $42,000 carryover, you're looking at only $13,200 in final taxable income. That's a dramatically different tax liability than if you were paying estimates based on the full $55,200. Just make sure you're calculating your safe harbor amounts correctly if you're adjusting your estimated payments. The IRS can still impose penalties if you underpay, even with legitimate NOL carryovers, if you don't meet the safe harbor thresholds. I learned this the hard way a few years ago and had to pay penalties despite having valid NOLs that eliminated most of my tax liability. The key is updating your estimated payment calculations as soon as you have a clear picture of how much NOL you'll be able to use for the year.

This thread has been absolutely invaluable! As someone who runs a small e-commerce business and has been dealing with NOL carryovers from my first two years of operations, I finally understand how the 80% rule actually works. The sequential calculation approach that everyone has outlined is exactly what I needed to hear - current year expenses first (dollar-for-dollar deduction), then apply NOL carryovers up to 80% of the remaining taxable income. I was definitely overcomplicating it by trying to apply the 80% limitation to everything at once. What really opened my eyes was the discussion about strategic year-end planning with NOL "headroom." I have about $35,000 in NOL carryovers and expecting around $52,000 in profit this year. After reading through all these explanations, I realize I can use my full carryover amount since 80% of my taxable income would be around $41,600 (assuming minimal additional current year expenses). The estimated tax payment considerations that @Yara Haddad brought up are particularly relevant for me. I've been making quarterly payments based on my gross profit without factoring in how my NOLs would reduce my final liability. Definitely need to recalculate my Q4 payment now! One thing I'd love to add to this discussion - has anyone dealt with NOL calculations when you have multiple business entities? I'm considering setting up an LLC for part of my operations and wondering how that might complicate the NOL picture. Thanks to everyone for making such a complex topic so much clearer. This community is amazing!