Net Operating Loss & the Carryforward Period

The Internal Revenue Service (IRS) allows a taxpayer who suffers a net operating loss to apply the loss against his taxable income during the year he incurs the loss. If a taxpayer's loss exceeds his taxable income in a given year, the IRS may allow him to use the excess to offset his income in both previous and subsequent tax years. The IRS cites a loss from operating a business as the most common cause of a person's net operating loss. Other deductions that may cause a net operating loss typically result from a taxpayer's moving expenses, casualty and theft, rental property and work as an employee.


Carryback Periods
The IRS determines the length of time a person may carry the amount of a net operating loss that exceeds his income for the current tax year back over the years preceding the loss based on the nature of the loss. The IRS generally allows a person to carryback a net operating loss over the prior two years. If a person suffers what the IRS views as an eligible loss, which is defined as from casualty or theft, or a federally declared disaster for certain small businesses or farms, the IRS extends his carryback period to three years. If a taxpayer suffers a farming loss or qualified disaster loss, the IRS further extends his carryback period to five years. The IRS increases the carryback period to ten years for a person who experiences a specified liability loss.

Waiving the Carryback Period
The IRS allows a taxpayer to waive his right to apply his current year's net operating loss against his taxable income during the years leading up to the loss. If a person waives the carryback period for his net operating loss, the IRS requires him to submit a written statement of his decision with his tax return. Once a taxpayer decides to waive his carryback period, the IRS forbids him to carry back any other net operating losses.

Carryforward Period
After a person exhausts or waives his carryback period, the IRS allows him to use the balance of his net operating loss that exceeds his current year's taxable income to offset his income in future years. A taxpayer's carryforward period equals the lesser of the number of years it takes to use the remaining net operating loss or 20 years.

How to Carry Losses
If a taxpayer decides to carry back his excess net operating loss, the IRS mandates that he first apply the full amount of his remaining loss to the earliest year in the carryback period. If a loss remains, the IRS then requires him to apply the remainder to the next earliest year, and then the next, until the carryback period expires. If a person waives his right to a carryback period or fails to use all of his net operating loss during it, the IRS permits him to apply the balance of the loss against his taxable income in the next tax year. The IRS allows a taxpayer to continue carrying any remaining loss forward until either he uses the full amount of the initial loss to offset his taxable income or the carryforward period ends.