Business losses are never the goal. However, in the world of high-stakes entrepreneurship, a “down” year isn’t just a setback; it’s a strategic asset waiting to be deployed.

If your business saw more expenses or deductions than revenue for the year, you’re looking at a Net Operating Loss (NOL). When handled correctly, these losses can become a powerful tool to shield future profits from the IRS, allowing them to be used to offset the lean times. 

Essentially, the tax code allows corporations and small business owners alike to “bank” today’s business losses for tomorrow’s success.

The 80% Rule for Business Losses

Under current IRS guidelines, most taxpayers no longer have the luxury of “carrying back” losses to previous years to get an immediate refund (with a few exceptions for farming). Instead, you must carry those losses forward.

The key with NOLs is finding the perfect balance: You can carry losses forward as long as you need, but you can only offset up to 80% of your taxable income in any single year. This means that if you have $300,000 in losses from 2025 and $300,000 in profit in 2026, for example, you can’t wipe out the 2026 tax bill entirely. You can only offset $240,000, leaving $60,000 of income subject to tax. 

Years ago, NOLs had an expiration date of 20 years, but now these business losses can be carried forward indefinitely. In the example above, the remaining $60,000 can be utilized in a future year. For this reason, consider your NOL strategy a marathon, not a sprint, with the potential of providing a steady reduction in tax liability over several profitable years.

For Pass-Throughs, Business Losses Are Personal

Business losses for S-corporations, partnerships, and family-owned LLCs don’t stay at the business level. They “pass through” to your personal return. But there is a speed bump known as the Section 461(l) Excess Business Loss (EBL) limitation, which limits the amount of net business loss you can use to offset non-business income (like capital gains from stocks or interest income). If a loss happened in 2025, the thresholds are roughly $313,000 for individuals and $626,000 for married couples filing jointly.

But not to worry: If your losses exceed these amounts, the “excess” doesn’t disappear. It simply transforms into an NOL carryforward for the following year. It’s the IRS’s way of ensuring you don’t over-benefit in creative ways, such as using a massive business expansion to completely erase a windfall from a stock sale in the same year.

Texas-Sized Added Value

For high-revenue Texas business owners, the strategy may have an extra layer. While Texas doesn’t have a state income tax, we do have the Texas Franchise Tax.

If your annual revenue is below the “No Tax Due” threshold—which was $2.47 million for 2024 and 2025 and is $2.65 million for 2026 and 2027—you likely won’t owe franchise tax, but you still have to file a report. However, if you are above that mark, Texas allows for a temporary credit for business loss carryforwards in certain specific scenarios.

Three Next Steps

A loss on paper today might be a tax deduction tomorrow, but only if you follow the right steps:

• Audit your projections: Is there a good reason to accelerate expenses like Bonus Depreciation for purchases that might create an NOL?
• Check your “basis” if you own an S-corporation: For S-corp owners, you can only deduct losses up to the amount of “basis” you have in the company. If your basis is low, that loss might be suspended.
• Coordinate with your advisors: Balance your current losses against your projected three-year growth to ensure you aren’t leaving money on the table.

With the right strategy, a deficit one year can become the “seed money” for your future growth. Feel free to contact us with questions.

shutterstock_2211694283 January 20, 2026