A net operating loss (NOL) occurs when a taxpayer’s allowable deductions exceed gross income for a taxable year. The Internal Revenue Code defines a net operating loss as “the excess of the deductions allowed by this chapter over the gross income.” See 26 U.S.C. §172(c). Section 172 allows taxpayers to apply an NOL to other tax years to offset taxable income through carrybacks or carryovers, subject to statutory limitations. Under §172(a), the NOL deduction generally may not exceed 80% of taxable income in the year to which the loss is applied.
[Last reviewed in April of 2026 by the Wex Definitions Team]
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