So you’ve had a rough year—revenues down, expenses up, and your tax return shows more losses than profits. Don’t despair. The tax code actually gives you a silver lining in the form of a Net Operating Loss (NOL).

What Is a Net Operating Loss?

A Net Operating Loss occurs when your allowable business deductions exceed your taxable income for the year. In simple terms: your business spent more money than it earned. NOLs most commonly arise from sole proprietorships, partnerships, S-corps, or other pass-through entities, but corporations can have them too.

How an NOL Can Help You

An NOL can be carried forward to future tax years to offset taxable income. This means if you take a loss this year but earn profits next year, you can apply that loss to reduce next year’s taxable income—potentially saving a significant amount in taxes.

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could also carry losses backward to get refunds for prior years. Now, most NOLs can only be carried forward indefinitely, although the amount of income you can offset is generally limited to 80% of taxable income in a given year.

How It Works (Example)

Let’s say your construction firm lost $100,000 in 2024 due to rising costs. In 2025, your firm bounces back with $120,000 in profit. If you carry forward that 2024 NOL, you can offset up to $96,000 (80%) of your 2025 income, meaning you’ll only be taxed on $24,000. That’s a real, tangible benefit of toughing it out through a bad year.

Who Can Use NOLs

You can claim an NOL if your losses come primarily from trade or business activities, casualty or theft losses, or certain real-estate-related operations. However, personal expenses, capital losses, or investment losses do not count toward an NOL.

Filing and Tracking

You’ll need to calculate and track your NOL using IRS Publication 536, which provides worksheets and examples. Keep clear records—especially your depreciation, business deductions, and adjusted gross income figures—so you can substantiate the loss in future years.

Why It Matters

NOLs serve as an important income-smoothing mechanism. They encourage entrepreneurship and risk-taking by allowing businesses to weather downturns without losing long-term tax efficiency. In short, the tax code gives you a chance to recover—not just financially, but fiscally.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.