What it means
When a company's tax deductions are larger than its income for a year, the difference is a net operating loss, or NOL. It isn't refunded. It's carried forward and deducted against taxable income in later, profitable years.
For federal tax, a loss from a tax year beginning after 2017 never expires, but in any later year it can offset at most 80% of taxable income computed before the NOL deduction. It generally can't be carried back to earlier years; farming losses and non-life insurance companies keep a two-year carryback, and losses from 2018 through 2020 had a temporary five-year carryback. States set their own rules, and many differ.
Section 382 limits the losses a company can use after an ownership change: an increase of more than 50 percentage points in the stock held by 5% shareholders over a rolling three-year period. Each priced round moves ownership to new investors, so a seed, a Series A and a Series B inside three years can add up to a change without any sale of the company.
After a change, the losses from before it can be used each year only up to the company's equity value just before the change times the IRS long-term tax-exempt rate, which was 3.95% for changes in October 2026. Any limit you don't use carries into the next year. Capital put in during the two years before the change is generally left out of the value, and if the business isn't continued for two years, the limit drops to zero.
A startup has a $10 million NOL when a round triggers an ownership change at a $20 million value. Its annual limit is $20 million × 3.95%, or $790,000. When it earns $3 million of taxable income, the 80% rule would let it use $2.4 million, but Section 382 lets it use only $790,000 of the old losses.
On the balance sheet, NOLs are a deferred tax asset under ASC 740, usually offset by a full valuation allowance while the company is losing money. The asset is worth only what you can actually use, so a Section 382 limit can reduce it before you ever earn a profit.
Why it matters. It's often a startup's largest tax asset. A financing or sale that moves more than 50 points of ownership within three years can trigger Section 382 and cap how much of it you can use each year.
Try it with your numbers
Change any number. The working below updates as you type.
NOL used = lesser of 80% × taxable income and, after an ownership change, Value × long-term tax-exempt ratePost-2017 losses carried into year 1.
Equity value immediately before the change.
IRS long-term tax-exempt rate for the month of the change.
Before the NOL deduction. A negative year is a loss.
Federal tax over four years
$3,011,400.00
How it’s worked out
- 1The 80% limit80% × taxable income before the NOL, each profitable year$1,200,000.00
- 2Annual §382 limit$20,000,000.00 × 3.95%$790,000.00
- 3NOL used over four yearsLesser of the 80% limit and the §382 limit, each year$3,160,000.00
- 4Federal tax over four years21% × taxable income after the NOL, summed$3,011,400.00
- 5Extra tax from the §382 limit$3,011,400.00 − $1,575,000.00 without an ownership change$1,436,400.00
- 6NOL left after year 4Carries forward with no expiry$6,840,000.00
| Year | Income before NOL | 80% limit | §382 room | NOL used | Tax at 21% | NOL left |
|---|---|---|---|---|---|---|
| Year 1 | $1,500,000.00 | $1,200,000.00 | $790,000.00 | $790,000.00 | $149,100.00 | $9,210,000.00 |
| Year 2 | $3,000,000.00 | $2,400,000.00 | $790,000.00 | $790,000.00 | $464,100.00 | $8,420,000.00 |
| Year 3 | $5,000,000.00 | $4,000,000.00 | $790,000.00 | $790,000.00 | $884,100.00 | $7,630,000.00 |
| Year 4 | $8,000,000.00 | $6,400,000.00 | $790,000.00 | $790,000.00 | $1,514,100.00 | $6,840,000.00 |
Federal only, at 21%, for losses from tax years beginning after 2017. The §382 value is the company's equity value immediately before the ownership change, reduced by capital put in within two years before it; the rate is the IRS long-term tax-exempt rate for the month of the change (3.95% for October 2026). The first year's limit is prorated if the change happens mid-year, built-in gains and losses can move it, and the limit is zero if the business isn't continued for two years. A loss year here adds a new NOL that §382 doesn't reach. General information; confirm with your tax adviser.
The entry, worked
A company with a $2,000,000 federal NOL and a full valuation allowance earns $1,000,000 of taxable income. It can use $800,000 of the NOL (80%), leaving $200,000 taxed at 21%, or $42,000.
| Account | Debit | Credit |
|---|---|---|
| Valuation allowance | $168,000.00 | |
| Deferred tax asset — NOL carryforward | $168,000.00 | |
| Income tax expense — current | $42,000.00 | |
| Income taxes payable | $42,000.00 | |
| Total | $210,000.00 | $210,000.00 |
The NOL used comes off the deferred tax asset and its full valuation allowance together, and the company pays tax on the 20% the NOL couldn't shelter.
Common questions
Do NOLs expire?
No. Federal losses from tax years beginning after 2017 carry forward indefinitely. Losses from 2017 and earlier carry forward 20 years and aren't subject to the 80% limit. State NOLs often expire.
Can raising money trigger Section 382?
It can. Ownership change counts increases by 5% shareholders over three years, and new investors in each round count. Whether a given round tips you over takes a Section 382 study of your cap table history.
Can we carry a loss back and get a refund?
Not for a federal NOL from a year after 2017 in most industries. It carries forward only. The 2018 to 2020 carryback was a temporary pandemic rule.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.