Net Operating Loss Rules for the Self-Employed (2026)

A net operating loss (NOL) is what you may have left over when your deductions for the year run past your income. For a sole proprietor, it usually starts as a Schedule C loss so large it wipes out every other dollar of income on the return and still has a balance. The IRS lets you carry that balance into future years and deduct it against future profit, but three rules control how: you cannot carry most losses back, the carryforward never expires, and in any later year the deduction is capped at 80% of taxable income. Before any of that, a separate limit, the excess business loss rule, decides how much of a big loss you can even use this year. This guide walks the whole chain for a self-employed filer, with the 2026 figures.

What a net operating loss is

The IRS puts it plainly: "If your deductions for the year are more than your income for the year, you may have a net operating loss." An NOL is not any business loss. A Schedule C that shows red for the year is a business loss, and on its own it offsets your other income, a spouse's wages, interest, a second job, on the same 1040. Only the amount that survives after wiping out all of that income becomes an NOL, the piece the current year has no income left to absorb.

That distinction is why an NOL is a small-business event more than a corporate one. A one-person business has a bad year, the loss swamps the household's other income, and the excess has nowhere to go on this return. The NOL rules are what let that excess move forward instead of vanishing.

Two things it is not. It is not a refund of taxes you paid; it is a deduction you carry to a year when you have profit to shelter. And the NOL is almost never equal to your negative taxable income, because personal deductions get stripped out of the calculation, which is the trap in the next section.

Do you even have an NOL? The nonbusiness-deduction trap

Here is the mistake that inflates the number. You total your return, taxable income lands at negative $53,100, and you assume that is your NOL. It is not. The Form 172 computation that figures an NOL adds several personal items back, and the biggest one for most filers is the standard deduction.

The rule the instructions state is that "you can deduct your nonbusiness capital losses ... only up to the amount of your nonbusiness capital gains," and more broadly that nonbusiness deductions count only up to nonbusiness income. Your standard deduction is a nonbusiness deduction. The calculation also strips out any NOL carried from another year and the qualified business income deduction under section 199A. What is left, after those add-backs, is the loss that came from running the business.

Work it for a single filer in 2026. Priya's design practice grosses $30,000 and runs $75,000 of expenses, a $45,000 Schedule C loss. She also has $8,000 of interest income and takes the 2026 standard deduction of $16,100.

Taxable income is negative $53,100, but the NOL is not $53,100. The standard deduction is a nonbusiness deduction, allowed only up to her $8,000 of nonbusiness income, so the extra $8,100 gets added back. Her NOL is $53,100 minus $8,100, which is $45,000, exactly the business loss. The $8,100 of personal deduction that outran her interest income goes to waste; it does not become an NOL. Miss that add-back and you carry forward $8,100 you are not entitled to.

The excess business loss limit hits high earners first

Before the NOL rules even apply, section 461(l) puts a ceiling on how much business loss a noncorporate taxpayer can use in a single year. For a year with a very large loss, this is the limit that bites first, and it is easy to miss because it lives on its own form.

The statute disallows an "excess business loss," defined as your aggregate business deductions over the sum of your business income plus a threshold amount. For 2026 that threshold is $256,000 for a single filer and $512,000 for a joint return, figures Revenue Procedure 2025-32 reset lower from the 2025 amounts of $313,000 and $626,000. The One Big Beautiful Bill Act, Public Law 119-21, made this limit permanent, removing the sunset that used to end it.

Most solo owners never touch it. Priya's $45,000 loss is nowhere near $256,000, so nothing is disallowed and her full loss flows through. But take a joint filer with a $700,000 business loss in one brutal year. The threshold is $512,000, so the excess business loss is $700,000 minus $512,000, which is $188,000. That $188,000 is not gone: the statute says a disallowed loss "shall be treated as a net operating loss ... for purposes of determining any net operating loss carryover under section 172," so it moves to next year as an NOL. Only $512,000 of the loss is usable in the current year. Whoever crosses this line files Form 461 to compute the disallowed amount.

The carryforward rules: no carryback, no expiration, 80% cap

Once you have an NOL, section 172 sets three rules that changed for losses arising after 2017.

No carryback. You cannot take today's loss back to amend a profitable prior year and claim a refund. The law makes a post-2017 NOL a carryover only, with one narrow exception: a farming loss keeps a two-year carryback. If your business is not farming, the loss goes forward, not back.

It never expires. A pre-2018 NOL had to be used within 20 years. A loss arising after 2017 carries "to each taxable year following the taxable year of the loss" with no end date. You can keep it until a profitable year uses it up.

The 80% ceiling. In a year you use the NOL, the deduction cannot exceed 80% of taxable income, figured before the NOL deduction and before the section 199A and 250 deductions. This is the rule that most often surprises people: a carryforward cannot zero out a profitable year.

Carry Priya's $45,000 into 2027, when her practice rebounds to $50,000 of taxable income before the NOL. Her deduction is capped at 80% of $50,000, which is $40,000. She deducts $40,000, pays tax on the remaining $10,000, and the unused $5,000 rolls to 2028 and beyond until it is absorbed. A profitable year leaves at least 20% of its taxable income exposed whenever a carryforward is in play.

How to claim it: Form 172 and Schedule 1

For tax year 2024 and later the IRS moved the NOL math onto its own form. Form 172, "Net Operating Losses (NOLs) for Individuals, Estates, and Trusts," is where you figure the loss, apply the add-backs, and track the carryover. Before December 2024 the same computation lived in worksheets inside Publication 536; the numbers did not change, only where you run them.

Claiming the deduction in a later year is one line. You enter the NOL carryover as a negative number on Schedule 1 (Form 1040), line 8a, "Net operating loss," which reduces your other income. Keep a running schedule for every NOL year: the year it arose, the original amount, how much you used each year, and the balance left. Because the carryforward has no expiration, that record may need to outlive the receipts behind it.

Common mistakes to avoid

Treating negative taxable income as the NOL. The most common error is carrying forward the full negative number on line 15. The standard deduction and other nonbusiness deductions get added back, so the true NOL is smaller. Run Form 172 rather than eyeballing the 1040.

Trying to carry a loss back. Unless you have a farming loss, a post-2017 NOL cannot go back to a prior year. Filing an amended return to claim a carryback refund on an ordinary business loss will not work.

Forgetting the excess business loss form on a big year. A loss over the 2026 threshold ($256,000 single, $512,000 joint) triggers Form 461, and the disallowed piece becomes next year's NOL. Skip the form and you overstate the current-year loss.

Expecting the carryforward to erase a good year. The 80% cap leaves 20% of a later year's taxable income exposed. Plan estimated payments accordingly rather than assuming a stored NOL covers everything.

Where SparkReceipt fits

An NOL stands on the loss being real, and the loss is only as solid as the records behind every deduction that created it. If the IRS looks at a year where your Schedule C ran deep into the red, the question is whether each expense was ordinary, necessary, and documented. That is a records problem, and it is the part SparkReceipt handles.

The AI reads each receipt and invoice, captures the vendor, date, total, tax, and line items, and sorts every expense into a tax category that lines up with Schedule C, with the original image kept on file. On the other side, the income tracker records the receipts that offset those costs, so the net loss you report is one you can prove line by line. SparkReceipt does not compute your NOL or file Form 172; the tax math lives on the return. What it gives you is the substantiated expense and income trail a loss year depends on, the same discipline that keeps your quarterly estimated taxes honest in the profitable years. You can see the plans and start capturing this year's records in minutes.

Frequently asked questions

What is a net operating loss for a self-employed person? It is the part of a business loss that is left over after the loss has offset all your other income for the year. A sole proprietor's Schedule C loss first cancels wages, interest, and any other income on the 1040; only the excess, adjusted for personal deductions, becomes an NOL that carries to future years.

Can I carry a net operating loss back to a prior year? No, not for an ordinary business loss arising after 2017. Section 172 makes it a carryforward only, with a narrow two-year carryback kept for farming losses. The loss goes to future years, where you deduct it against profit.

How long does an NOL last? Indefinitely. A loss arising after 2017 carries forward with no expiration until a profitable year uses it up. Losses from before 2018 were limited to 20 years, but that clock no longer applies to newer losses.

Why is my NOL smaller than my negative taxable income? Because the Form 172 computation adds back personal items, chiefly the standard deduction to the extent it exceeds your nonbusiness income, along with the QBI deduction and any NOL from another year. Only the portion of the loss that came from the business itself carries forward.

What is the excess business loss limit for 2026? $256,000 for a single filer and $512,000 for a joint return, per Revenue Procedure 2025-32. A business loss above that threshold is disallowed for the current year and treated as an NOL carried to the next year. The One Big Beautiful Bill Act made this limit permanent.

Key takeaways

• A net operating loss is the piece of a business loss that outlives the year: what remains after the loss has offset all your other income on the 1040.
• Your NOL is usually smaller than your negative taxable income, because the standard deduction and other nonbusiness deductions are added back on Form 172.
• The excess business loss limit applies first. For 2026 it disallows business losses above $256,000 (single) or $512,000 (joint) and pushes the excess into next year's NOL.
• A post-2017 NOL cannot be carried back (except farming losses) and never expires; it carries forward until profit absorbs it.
• In any year you use the NOL, the deduction is capped at 80% of taxable income, so a carryforward cannot fully erase a profitable year.
• You figure the loss on Form 172 and claim the carryover on Schedule 1, line 8a; the deduction is only as defensible as the expense and income records behind the loss.