A bad business year can feel discouraging—but from a tax perspective, it doesn’t have to be a waste. If your business expenses exceed your income, you may generate a Net Operating Loss (NOL), and that loss can be carried forward in future years.
Under current federal law, most NOLs can be carried forward indefinitely and used to offset up to 80% of taxable income in future profitable years. So, a loss today can reduce taxes later & improve future cash flow.
Example:
Assume your business generated a $100,000 NOL in 2025. In 2026, your income rebounds and you earn $150,000 of taxable income. You can use the NOL to offset $80,000 of that income (80% of $100,000), leaving $70,000 subject to tax. If you’re in the 32% federal tax bracket, that NOL translates into $25,600 of federal tax savings.
The key takeaway: if you’ve had a down year—or expect one—this can be a silver-lining to an otherwise discouraging year. But it only works if it’s properly tracked, reported, and integrated into your long-term tax plan.
Action items to consider:
1. Make sure you’re tracking NOL’s – The IRS doesn’t require that NOL’s be tracked on your business tax return. And while most tax software does track the losses year-over-year, if you switch tax preparers, an NOL can easily get lost in the shuffle. If you’ve had a down year(s), make sure your tax pro is aware of prior losses & is tracking them.
2. Coordinate NOL usage with other strategies – If you have multiple businesses or other investments, plan ahead so that you can coordinate using the loss to potentially offset other gains on your tax return and reduce your overall tax liability.
