In business, not every year ends in profit, but a financial loss doesn’t have to be a setback. In 2025, net operating losses (NOLs) remain a valuable tool under the U.S. tax code, giving business owners a strategic way to offset future taxable income and strengthen long-term financial health. Whether you’re navigating a startup launch, seasonal swings, or a volatile market, understanding how to leverage NOLs can turn today’s challenges into tomorrow’s tax savings.
How NOLs Work
An NOL occurs when a business’s allowable deductions exceed its annual taxable income. Rather than letting the loss stand alone, businesses can apply NOLs to reduce taxable income in future profitable years, creating important financial relief.
The ability to use NOLs depends on a company’s structure. C corporations apply NOLs directly against corporate income. Pass-through entities, such as S corporations and partnerships, pass losses to owners, who deduct them on their personal returns, subject to basis limits and passive activity rules.
For multinational businesses, using NOLs can be complicated by rules governing foreign tax credits and GILTI (Global Intangible Low-Taxed Income). In addition, state tax laws often diverge from federal rules, requiring careful coordination across jurisdictions.
Evolving Federal Rules
NOL rules have changed significantly over the past few years. Today, businesses can carry forward unused NOLs indefinitely. However, under the Tax Cuts and Jobs Act (TCJA), NOL deductions are capped at 80% of taxable income each year for losses arising after 2017. Losses from earlier years can still offset up to 100% of taxable income. Careful record keeping is critical to correctly applying older and newer losses.
Carrybacks, once a common strategy for claiming refunds from prior profitable years, are now mostly prohibited—except for certain farming businesses, which retain a two-year carryback option.
Why NOLs Matter
NOLs are more than just tax reporting details—they are a critical asset in strategic financial planning. By reducing future tax liabilities, businesses can free up cash flow that can be reinvested into operations, growth initiatives, or talent. NOLs also provide valuable tax planning flexibility, allowing companies to time the use of losses around expected revenue increases to minimize overall tax exposure. For startups and growing companies, NOLs can enhance investor appeal by serving as a future benefit that supports long-term profitability.
However, careful planning is essential. If more than 50% of a company’s stock ownership shifts over a three-year period, the ability to use existing NOLs may be significantly restricted based on the company’s value at the time of the change. Businesses anticipating mergers, acquisitions, or ownership transitions must proactively address these rules to preserve the value of their losses.
Navigating State Differences
While federal rules create a broad framework, state tax treatment of NOLs varies widely. Some states cap deductions at different percentages, limit carryforward periods, or temporarily suspend the use of NOLs. States like California and Illinois have limited NOL use, while Connecticut and Rhode Island have extended carryforward periods to better align with federal law.
Because state policies are subject to frequent changes, businesses with multistate operations must carefully track and manage their federal and state NOL profiles to protect the value of their losses.
Spotlight on Pennsylvania
Pennsylvania has historically imposed one of the most restrictive NOL rules, capping deductions at 40% of post-apportionment taxable income. That is changing. In July 2024, legislation was passed to gradually raise the deduction limit by 10% annually, reaching 80% by 2029.
Losses incurred before 2025 remain subject to the 40% cap, while losses after 2024 will benefit from the phased increases. Although Pennsylvania maintains a 20-year carryforward period, businesses must carefully track losses by year to maximize future deductions.
Strategic Timing Matters
Getting the most out of NOLs requires strategic timing. If tax rates are expected to rise, preserving NOLs to offset income taxed at higher rates may be advantageous. Similarly, businesses should consider where they stand in the economic cycle: using NOLs during profitable periods can boost cash flow, while saving them during downturns may yield greater benefits in later recovery years.
Staying informed about tax policy changes, economic trends, and corporate growth projections is key to effectively deploying NOLs.
The Bottom Line
Net operating losses may not be the outcome businesses aim for, but with careful planning, they can provide lasting tax advantages. If your business has current or prior-year losses, now is the time to revisit your NOL strategy. In 2025, success starts with understanding the latest rules, maintaining thorough records, and working with a trusted advisor to turn today’s losses into tomorrow’s opportunities.
To explore the best approach for your business, contact your Stephano Slack tax manager or partner at 610-687-1600 or TaxInfo@StephanoSlack.com.
Author Jennifer Crawford, CPA, is a manager dedicated to helping high-net-worth individuals and small to middle-market businesses navigate complex tax matters, focusing on family-owned businesses. Known for her strategic thinking and expert insights, Jenn works closely with her clients to develop customized tax planning strategies that maximize savings and reduce tax liabilities. Her deep understanding of tax regulations and proactive approach helps clients remain compliant while fully leveraging opportunities to save. To discover how Jennifer can help you implement tax-saving strategies, contact her at 610-687-1600 or jcrawford@stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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