My small business lost money in 2025 — can I use that loss to reduce taxes in future years?
Yes — if your business deductions exceed your income, you may have a Net Operating Loss (NOL) that can be carried forward to offset taxable income in profitable future years. This is one of the key tax safety nets for small business owners.
What counts as a business NOL:
An NOL occurs when your allowable deductions from business (and other) sources exceed your gross income for the year. For Schedule C filers, this typically means:
- Your business expenses + any other deductions (home mortgage interest, student loan interest, etc.) exceed your total income from all sources
- The result after calculating your Form 1040 is a negative taxable income
Current NOL rules (post-TCJA, confirmed through OBBBA):
| Rule | What It Means |
|---|---|
| Carryback: eliminated | You cannot carry an NOL back to prior tax years (for most taxpayers — some farming/insurance exceptions exist) |
| Carryforward: indefinite | You can carry the NOL forward indefinitely until fully used |
| 80% income limitation | In a profitable year, the NOL can only offset up to 80% of taxable income — you cannot eliminate all taxable income with an NOL carryforward |
Practical example:
- 2025: Business loss of $40,000 → NOL of $40,000 created
- 2026: Business profit of $80,000 → You can deduct up to $64,000 (80% of $80,000). Tax is owed on $16,000. Remaining NOL: ~$16,000 carried to 2027
- 2027: Remaining NOL used to offset future income
How to track and claim your NOL:
- Calculate it on Schedule A of Form 1045 (Application for Tentative Refund) or per the Form 1040 NOL worksheet in IRS Publication 536
- Track it by keeping records each year of remaining NOL carryforward — the IRS does not send you reminders
- Claim it on Schedule 1 of Form 1040 in future profitable years
Critical nuance — "passive" vs. "active" business losses:
If you own a passive business interest (you don't materially participate), the loss is a passive activity loss (PAL), not an NOL. PALs can only offset passive income — they don't create a true NOL. Most Schedule C businesses where you actively work are non-passive.
State NOL rules vary: Many states don't conform to the federal 80% rule or the indefinite carryforward — some have stricter limits. Check your state's rules.
Sources
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