How to Fill Out IRS Form 172 (w/Examples) + FAQs

To fill out IRS Form 172, complete the taxpayer information section, then calculate your Net Operating Loss in Part I and any carryover in Part II, and attach the form to your federal tax return.

Over half of all tax returns contain errors, making careful completion of forms like Form 172 critical to avoid IRS issues.

What you will learn in this guide:

• 📄 What IRS Form 172 is – Understand its purpose and who should file it
• ✍️ Step-by-step how to fill out Form 172 – Breaking down each part of the form
• 📊 Examples of Form 172 in action – Three common scenarios with numbers and outcomes
• ⚖️ Key federal NOL rules vs. state differences – How carrybacks, carryforwards, and limits work (and vary by state)
• ❌ Mistakes to avoid & penalties – Common errors, how to avoid them, and insights from tax court cases

What Is IRS Form 172 and Who Needs to File It?

IRS Form 172 (titled “Net Operating Losses (NOLs) for Individuals, Estates, and Trusts”) is a tax form introduced for tax year 2024 and beyond. It is used to calculate and report a Net Operating Loss (NOL) for non-corporate taxpayers. In plain terms, an NOL happens when your allowable tax deductions for the year exceed your taxable income for that year. If you’re an individual taxpayer, a small business owner (sole proprietor or pass-through entity owner), or an estate/trust and you have more deductions than income, you likely have an NOL and need to include Form 172 with your tax return. This form tells the IRS how big your loss is and how you plan to use it (either in past or future tax years).

Who must file Form 172? Anyone (other than C-corporations) who wants to claim a Net Operating Loss deduction should fill out Form 172. For example: if you run a business or have rental properties and your business losses, deductions, or disaster-related losses are larger than your income, you’ll use Form 172 to compute that loss. The IRS requires this form so that the NOL is documented and can be carried to other tax years correctly. Notably, partnerships and S-corporations themselves do not file Form 172 (they pass losses to partners/shareholders), but the individual partners or S-corp owners would file it on their own returns if they personally have an NOL. Estates and trusts also use Form 172 in the same way as individuals. In short, if you suspect an NOL on your Form 1040 or Form 1041, Form 172 is the tool to calculate it.

Why does Form 172 matter? Properly calculating an NOL can save you money. An NOL allows you to offset taxable income in other years – potentially leading to tax refunds or lower future taxes. Form 172 formalizes the NOL computation (it essentially replaces older worksheet methods) to ensure consistency and completeness. The IRS uses the information on Form 172 to verify that your NOL is calculated according to tax law rules. If Form 172 is not filed when required (or filled out incorrectly), the IRS may disallow your NOL deduction, which means you’d lose out on tax savings and could even face penalties for underreporting income. In summary, Form 172 is your ticket to claim valuable tax relief from losses, and doing it right is crucial.

Understanding Net Operating Losses (NOLs)

A Net Operating Loss (NOL) is a valuable concept in U.S. tax law that essentially lets you take a “loss” in one year and use it to reduce taxable income in other years. Here’s what that means:

• Definition: An NOL occurs when your deductions exceed your income for a tax year. In other words, you had a negative taxable income due to losses or excessive deductions. This often happens to small businesses or self-employed individuals whose business expenses are higher than their revenues, but it can also result from events like casualty losses (e.g. a natural disaster) or certain deductions outpacing income.
• What can create an NOL? Typically, NOLs arise from business or trade losses. If you’re a sole proprietor or independent contractor, this could mean your business expenses (reported on Schedule C) were higher than your business income. For farmers, large farming expenses or losses can create an NOL. Other sources include rental real estate losses (if not limited by passive loss rules), and casualty or theft losses from a federally declared disaster. Some less common sources: certain employee business expenses (though most unreimbursed job expenses aren’t deductible from 2018–2025 due to tax law changes), and moving expenses for military (limited cases). It’s important to note that ordinary personal expenses (like your standard deduction or personal exemptions) by themselves don’t generate an NOL – the loss must come from business or other allowed categories. For example, a large charitable donation alone won’t produce an NOL if you have no business loss; but a large casualty loss from a hurricane might, because it’s an allowed deduction contributing to an NOL.
• Who cannot have an NOL? By law, certain entities cannot use NOLs themselves. A partnership or S-corporation doesn’t directly claim NOLs at the entity level – instead, the losses flow through to the partners’ or shareholders’ personal returns, where those individuals might then have an NOL and file Form 172. Similarly, trusts and estates can have NOLs (and would file Form 172) if their deductible expenses and distributions exceed their income. C-corporations have their own NOL rules and do not use Form 172 (they use different forms, and the rules for corporate NOLs are similar but handled on corporate tax returns).

In essence, an NOL lets you get tax benefits from a bad year. The tax code recognizes that if you lost money in business this year, you should be able to use that loss to offset profits in other years. However, there are detailed rules on when and how you can apply that NOL to other years – which brings us to carrybacks and carryforwards.

How NOLs Work: Carrybacks, Carryforwards, and Key Rules

Under U.S. federal tax law (IRC Section 172), NOLs can be applied to other tax years in two ways: carried back to prior years or carried forward to future years. Using an NOL in a different year lets you get a refund for past taxes or cut a future tax bill. The rules have changed in recent years, so let’s break it down:

Carrying NOLs Forward (the default rule)

For most non-corporate taxpayers after 2020, NOLs can only be carried forward, not back. A carryforward means you save the NOL and use it in a future year (or years) until it’s exhausted. Key points about carryforwards:

• Indefinite carryforward: In the past, NOLs expired after 20 years, but current law allows you to carry an NOL forward indefinitely until it’s used up. There’s no longer a time limit (thanks to the Tax Cuts and Jobs Act of 2017). This is good news – you won’t “lose” the NOL if it takes you more than 20 years to use it.
• 80% limitation: There is a catch – when you use an NOL carryforward in a tax year, you can only use it to offset up to 80% of that year’s taxable income. In other words, you cannot reduce your current year’s taxable income beyond 80% using post-2017 NOLs. For example, if you have a $100,000 NOL carryforward and in 2025 you have $50,000 of taxable income (before the NOL), you may deduct at most $40,000 of NOL in 2025 (which is 80% of $50k). You’d still have $10k of taxable income left, and the remaining $60k of your NOL would carry forward further. This rule ensures that even with large NOLs, a taxpayer will pay at least some tax in a profitable year (unless they also have older NOLs from before 2018, which are not subject to the 80% rule).
• Order of usage: If you have multiple NOLs from different years, you typically use them in the order they arose (earliest first). Form 172 Part II helps track how much of the NOL is used each year and how much remains to carry on.
• Excess business loss tie-in: Note that for 2018–2025, there’s an Excess Business Loss (EBL) limitation (Form 461) for individuals. If your business losses exceed a certain threshold ($313,000 for single or $626,000 for joint filers in 2025, adjusted annually for inflation), the excess beyond that limit is not deductible in the current year – instead, that excess automatically becomes part of your NOL carryforward. In practical terms, the EBL rule caps how much loss you can use in the current year, and forces any extra loss into an NOL. Form 172 will include those disallowed excess losses as part of the NOL calculation. (This means high-income individuals with very large losses might see those losses split – some used currently up to the limit, and the rest carried forward via Form 172.)

Carrying NOLs Back (limited to specific cases)

Prior to 2018, the tax law generally allowed a 2-year carryback for NOLs (and 20-year forward). However, current law (for NOLs arising in 2018 and later) eliminated the general carryback option. You usually cannot carry back a modern NOL to prior years to get a refund, except in special cases. Here are the exceptions and details:

• Farming loss carryback: The one major exception is for certain farming businesses. If you have a farm NOL (losses from farming activities) in a post-2020 year, you are allowed to carry back that farm NOL up to 2 years. You must carry it to the earliest of the two years first, then the second year if any NOL remains. For example, a farm NOL in 2024 can be carried back to 2022 first, then 2023. This can produce a refund of taxes paid in those prior years, which is often very helpful for farmers who might have cyclical good and bad years. You also have the choice to waive the carryback if you prefer to only carry it forward (more on that in a moment). Aside from farm losses, most other post-2020 NOLs have no carryback opportunity – they go straight to carryforward. (There was a temporary COVID-related rule: the CARES Act of 2020 allowed carrybacks for 2018–2020 NOLs for up to 5 years, but that window has closed and doesn’t affect 2024 onward; it’s good to be aware of historically, but current and future NOLs follow the no-carryback rule except farms.)
• Waiving the carryback (for farms): If you do have a qualifying farming NOL and you don’t want to carry it back (maybe you prefer to use it in future years, or the prior years had little tax to recover), you must formally elect to waive the carryback period. This election is done by attaching a statement to your original tax return for the NOL year, indicating you’re opting out of the carryback under IRC 172(b)(3). The statement should say you’re waiving the carryback period for that NOL. Important: this must be done by the return due date (including extensions). If you miss that, the IRS may allow a late election within 6 months on an amended return (with “Filed pursuant to Section 301.9100-2” written at the top of the statement), but beyond that, the election is irrevocable and if not made, the law would technically require you to carry back the farm loss. (In practice, if you don’t carry it back and just carry forward, the IRS needs that waiver on file to not expect a carryback claim.) So farmers, take note – decide early if you want the refund now or later.
• Other specialized carrybacks: There are a few very narrow cases (not common for most taxpayers) where carrybacks might still apply, such as certain losses for property and casualty insurance companies or section 965 (transition tax) interaction years where carryback is disallowed entirely. For 99% of individuals and small businesses, it’s either farming or nothing when it comes to carrybacks after 2020.

Why does carryback vs. carryforward matter?

It’s essentially a timing issue: do you get a tax benefit from your loss now by amending/prior year refunds, or later by reducing future taxes? For most people, since carryback isn’t available, the NOL simply reduces taxable income in future years. But if you’re eligible (e.g. a farmer) or if you’re reading about older NOL rules, it’s good to understand both. In the next section, we’ll provide a quick Pros and Cons comparison of carrying an NOL back versus forward, which can help if you have a choice.

Pros and Cons of NOL Carrybacks vs. Carryforwards

Even though most taxpayers today will only carry NOLs forward, it’s useful to know the advantages of each approach (especially for those who do have a carryback option). Below is a breakdown:

Pros of Carryback / Carryforward	Cons or Drawbacks
Carryback – Pro: Provides an immediate tax refund. You can get cash back from prior years’ taxes, improving cash flow when you might need it most (after a loss year).	Carryback – Con: Limited availability. Only certain losses (e.g. farm NOLs) qualify after 2020. Also, you must act fast – carryback claims have tight deadlines (generally within 1 year via Form 1045).
Carryforward – Pro: Allows you to apply the NOL to future profits, potentially in years when your income (and tax rates) are higher. Also, carryforwards are indefinite, so no expiration of your tax benefit.	Carryforward – Con: Delayed benefit. You have to wait for future years to use the loss. Plus, usage is capped – an NOL carryforward can only offset 80% of taxable income each year, potentially stretching the benefit over many years.
General – Pro: Both methods prevent a big one-year loss from being wasted; you get to spread the benefit of that loss to healthier tax years. This smooths out taxable income over time.	General – Con: Using NOLs can be complex. There’s paperwork (like Form 172, and possibly Form 1045 or amended returns for carrybacks), and record-keeping is crucial. Mistakes or poor documentation can lead to IRS challenges or even accuracy-related penalties if an NOL is disallowed.

Tip: If you are eligible for a carryback (e.g. a farming NOL) but expect future income to be taxed at a higher rate, you might choose to waive the carryback and carry forward instead, aiming to use the NOL against that higher-taxed income later. On the other hand, if you need cash now or if future tax rates are uncertain, a carryback for a quick refund could be more valuable. Always consider consulting a CPA or tax advisor when making this decision, as they can help forecast the tax impact.

Step-by-Step Guide: How to Fill Out IRS Form 172

Now let’s dive into filling out Form 172 itself. The form is three pages long and divided into two main parts (Part I and Part II), plus a top section for basic information. Here’s a breakdown of each component and how to complete it:

1. Taxpayer Information Section (Top of Form 172)

At the very top of Form 172, you’ll fill in identifying information, much like other tax forms. This section includes:

• Tax Year: Indicate the tax year for which the form is being filed. For most individuals, this will be the calendar year (e.g. 2024). If you file on a fiscal year basis (not common for individuals, but some trusts or estates do), you’d enter the fiscal year period (for example, “Fiscal year ending June 30, 2025”). Ensure the year matches the return you’re attaching this form to.
• Name and Address: Use the same name (or names, if a joint return) and address as on your Form 1040 or 1041. If it’s a joint individual return, include both spouses’ names. For an estate or trust, this would be the entity’s name. Make sure this is identical to your main return’s name line to avoid confusion. Include street, city, state, and ZIP as requested. If you have a foreign address, the form provides space for country and foreign postal code – don’t abbreviate the country name.
• Social Security Number or EIN: If this is for an individual or couple, enter the primary taxpayer’s Social Security Number (SSN) (and spouse’s SSN on the separate line if married filing jointly). If the form is for an estate or trust, enter that entity’s Employer Identification Number (EIN) instead. This number is crucial – it ties the Form 172 to the correct taxpayer. Double-check that the SSN/EIN is correct and matches your tax return.
• Contact Information: There’s usually a line for a daytime phone number. While optional, it can be helpful to provide a number in case the IRS has questions (so issues can be resolved more quickly).

This section is straightforward. Essentially, treat it like the top of your 1040 – you’re just telling the IRS who is claiming the NOL.

2. Part I – Calculating the Current Year NOL

Part I of Form 172 is where you calculate your Net Operating Loss for the year (if there is one). It’s a step-by-step worksheet that starts from your income and deductions and then makes a series of adjustments required by law to determine the allowable NOL. We won’t detail every line, but here’s the process in a nutshell:

• Line 1 – Adjusted income (or taxable income): For individuals, this line starts with your Adjusted Gross Income (AGI) minus either your standard deduction or itemized deductions. In simple terms, it’s trying to get to your taxable income before personal exemptions (since personal exemptions are not allowed for NOL calculation) and before any NOL deduction from other years. If you’re filing Form 1040, your AGI is on line 11 of the 1040, and your deduction (standard or itemized) is on line 12. Subtracting line 12 from line 11 of the 1040 gives a starting point. For estates and trusts (Form 1041 filers), you would start with taxable income but add back the trust’s exemption and any income distribution deduction or charitable deduction from the trust return, since those are treated similar to personal deductions that shouldn’t create an NOL. Essentially, Line 1 is the “income minus general deductions” figure. If that result is negative already, you likely have an NOL, but you must continue Part I to adjust the amount.
• Lines 2–5 – Capital losses and gains (nonbusiness): These lines adjust for capital losses that are not related to a trade or business. For individuals, you can only deduct up to $3,000 of net capital losses against other income each year – but for NOL purposes, any capital loss beyond that limit can’t contribute to an NOL. So, Form 172 adds back nonbusiness capital loss amounts that were over the limit. You’ll enter your nonbusiness capital losses on Line 2 (before the $3k limitation) and your nonbusiness capital gains on Line 3. The form then has you net them: Line 4 will effectively be the amount of loss beyond gains (if losses exceed gains), and Line 5 would be gains over losses if gains were bigger. Only one of those lines will have a value (or both zero) because either you had a net loss or a net gain or they balanced. The key takeaway: if you had, say, a $10,000 stock market loss and only $2,000 of gains, normally you could only deduct $3,000 of that loss on your 1040. For NOL purposes, the extra $5,000 of disallowed capital loss doesn’t count towards the NOL – it’s added back. This prevents purely investment capital losses from creating an NOL beyond the normal limit.
• Lines 6–8 – Nonbusiness deductions vs income: The form then addresses other nonbusiness deductions. These include things like the standard deduction or itemized deductions that are not directly related to a business. The rule is that nonbusiness deductions cannot create an NOL in excess of nonbusiness income. In practice, Form 172 will compare your nonbusiness deductions (line 6) to your nonbusiness income (line 7). Nonbusiness income includes things like wages, interest, dividends – basically income that isn’t from a business activity. If your personal deductions (e.g. standard deduction, charitable contributions, etc.) are larger than your nonbusiness income, the excess portion doesn’t count toward the NOL and is added back. This ensures the NOL is generated mainly from business or casualty losses rather than, say, an oversized standard deduction. On the form, Line 8 will be the excess of nonbusiness deductions over nonbusiness income, if any (this excess gets added back to reduce the NOL).
• Lines 9–10 – Calculate tentative NOL: After those adjustments, you’ll get to a subtotal (modified taxable income) and then start factoring in business-related items. Any remaining negative amount is essentially from business, rental, or casualty sources. You then include business capital losses and other business expenses that might have limits, and subtract any business income, to arrive at the total loss from business sources. Part I continues methodically through other required modifications (like removing any qualified business income (QBI) deduction or Section 1202 exclusion if they were present, since those can’t deepen an NOL). Each line guides you to add or subtract certain items to comply with IRS rules.
• Line 21 – Net Operating Loss for the year: Finally, after all adjustments, if you have a negative number, that is your current year NOL. (If it turns out positive, then you didn’t end up with an NOL after adjustments – often this means your losses weren’t enough to overcome all income once adjustments are done.) This amount on Line 21 is the NOL that can potentially be used in other years. If you have an NOL on line 21, Part I will direct you to Part II to figure out what to do with it (carrybacks or carryforwards). If there is no NOL (line 21 is zero or positive), you’re done – Form 172 would just show no NOL, and typically you wouldn’t carry anything to Part II.

Throughout Part I, the form is essentially following the guidelines from IRS Publication 536 (NOL computations) but now in a standardized format. Some key points/definitions for Part I:

• Nonbusiness vs. business: “Business” income and deductions generally mean those from a trade or business, including self-employment, farming, or rental activity. “Nonbusiness” means investment or personal. The form separates these to ensure only business-related losses generate the NOL. (For example, your standard deduction is nonbusiness – if it contributes to a negative income, that portion won’t count as NOL.)
• Casualty losses: Casualty and theft losses (from federally declared disasters) are considered business losses for NOL purposes (even if they were personal itemized deductions). So they can contribute to an NOL. The form will include them accordingly – so if you had a big casualty loss, that likely flows into the NOL calculation as a business deduction.
• No double counting: If you already used a deduction on your tax return, you don’t “add it again” for NOL – the form is only adjusting what’s already in your taxable income. It either adds back or ignores certain deductions to comply with rules.

In summary, Part I of Form 172 is a worksheet that starts from your taxable income calculation and systematically adds back or removes items to arrive at the pure NOL. Filling it out might seem tedious, but tax software will do most of the heavy lifting. If doing it manually, follow each line carefully and use the IRS instructions which explain each line’s purpose. After Part I, you’ll know the amount of your NOL (if any) for the year.

3. Part II – NOL Carryover (Using the NOL in Other Years)

Part II of Form 172 deals with what happens to your NOL after you’ve calculated it. This section is about applying the NOL to other years – whether that means carrying it back (if allowed) or carrying it forward. It essentially helps you determine: how much of the NOL gets used in each applicable year, and how much remains to carry forward to the next year. Here’s how to approach Part II:

• One column per year: Part II is structured in columns, each representing a tax year to which the NOL is applied. If you are carrying the NOL back, you’ll have up to two columns for the two carryback years (starting with the earliest year first). If you’re only carrying forward, you might only fill the column for the current loss year’s carryforward calculation. The form’s layout might show labels like “Second preceding year”, “First preceding year”, and “Subsequent year” or similar. For a post-2020 NOL (no carryback), you’d skip directly to the “subsequent year” carryover column (which essentially calculates the NOL carryover to next year).
• Line 1 – NOL deduction in that year: For each year column, Line 1 will ask for the NOL amount you’re applying to that particular year. For a carryback year, this would be the amount of the NOL you are using to offset income in that prior year. For a carryforward (future year) column, initially, you might leave it blank until you figure how much is left. Essentially, you’ll fill in how much of your NOL is absorbed by that year.
• Line 2 – Taxable income before NOL: This line wants the taxable income of that carryback or carryforward year, before applying the NOL deduction. This is important because the amount of NOL you can use is limited by that year’s income (and the 80% rule in carryforward years). If you’re carrying back to, say, 2022, you’d take your taxable income from 2022’s return (as originally filed) and put it here, with modifications if required (for example, you would remove any NOL deduction that was originally on that return, since we’re recalculating it with the new NOL). For carryforward usage, if you are using some NOL in the very next year, you’d put that next year’s taxable income (pre-NOL) here to see how much of the NOL can be used.
• Limiting the NOL used: Part II will then walk you through deducting the NOL against that year’s income. If it’s a carryback year, old rules allowed full offset up to wiping out 100% of income (for years before the 80% rule kicked in, which is before 2021). If it’s a carryforward year (2021 and later), remember the 80% limit – the form will effectively enforce that by not letting Line 1 (NOL used) exceed 80% of Line 2 (that year’s income). For example, in a carryforward scenario, if 2025’s taxable income was $50k and you have a big NOL, the maximum you’d enter on Line 1 for 2025 column is $40k (which is 80% of 50k).
• Lines 3–6 (for carryback adjustments): If carrying back, the form requires some recomputation of that prior year’s items like capital loss limitations, qualified business income deduction, etc., because when you insert an NOL into a prior year, it can change things like how much of a charitable contribution or QBI deduction was allowed (some deductions are based on a percentage of AGI or taxable income, which now would be lower with the NOL). Part II has lines to recalculate those aspects (for instance, if you carry an NOL to 2022, you may need to refigure 2022’s charitable deduction limitation based on the new lower income, etc.). These lines ensure you don’t accidentally allow more deductions in the carryback year than originally permitted. This is a complex area, but in practice it might slightly reduce the NOL you can use if, say, part of the NOL would have increased a prior year’s charitable contribution limit – the form accounts for that by adjusting the “Modified taxable income” of the carryback year.
• Line 9 – Modified Taxable Income: After making any needed adjustments for that year, Line 9 of Part II gives the “modified taxable income” for that year (with the NOL applied but before actually subtracting it fully). Essentially, if you are carrying back, a modified taxable income of zero or a small number indicates how much of the NOL was used to bring that year’s taxable income down as far as allowed. If not all NOL was used in the first carryback year, the remainder goes to the next year.
• Carrying to next year: Once you apply the NOL to a year and reduce that year’s taxable income (possibly to zero), you subtract the used portion from the NOL and carry the rest to the next column (year). You then repeat the process for the next year: see how much you can use there, apply any limits, and then get a remaining NOL.
• Line 10 – NOL carryover to future year: After you’ve applied the NOL to all allowed carryback years, whatever is left is your NOL carryforward to the year after the NOL year. If no carrybacks are allowed (most common scenario now), then essentially 100% of your NOL from Part I carries forward (minus anything you might have used in the current year if you had prior year NOL deductions, but that’s a different nuance). Part II will show that remaining NOL on Line 10, which is the amount you take into the next tax year as a carryover. This is the number you’ll use on next year’s taxes as an NOL deduction (subject to the 80% rule at that time).

In summary, Part II is like the road map for your NOL’s journey. If only carryforward is involved, it’s fairly straightforward: you’ll basically state “I have $X NOL, none used in prior years, so carry $X to next year.” If carrybacks are involved, Part II makes sure you apply to Year -2 first, then Year -1, then forward, and it keeps track of usage.

A couple of additional points while filling Part II:

• Attach Form 172 to any carryback claims: If you carry back an NOL to a prior year, you will likely be filing either Form 1045 (Application for Tentative Refund) or an amended return (Form 1040-X for individuals, or amended 1041 for trusts) for those years. In those filings, you should attach a copy of Form 172 to show how you calculated the NOL and how much is used. The IRS will want to see the Form 172 from the NOL year substantiating the deduction you’re claiming in the earlier year.
• Records: Keep a copy of Part II because you’ll need to remember how much NOL is left for future years. When you move to the next tax year, if you still have carryforward, that next year’s return will include its own Form 172 Part II to show the usage. Essentially, Form 172 will be used each year until the NOL is fully utilized, if it spans multiple years.
• Multiple NOLs: If you generate another NOL before the first one is used up (say, you have losses in 2024 and 2025), you might be juggling two NOL carryforwards in 2026. The forms and IRS instructions spell out that you use the earliest NOL first. You may need separate computations for each, but typically software will handle it by tracking them separately. Just be aware that each year’s NOL remains distinct in how it’s applied (first-in, first-out).

By the end of Part II, you will have clarity on three questions: Did I use any of the NOL in previous years? How much of the NOL is being used to offset the current year’s income (if a prior NOL is being applied)? And how much NOL will I carry into next year? Armed with that, you can properly fill in your tax return (for instance, if you have an NOL carryover to next year, you’ll remember to claim it on that next year’s 1040, line for NOL deduction).

4. Filing and Submitting Form 172

After completing Parts I and II, you’re ready to include Form 172 with your tax filing. Here’s how to submit it and when:

• Attach to your tax return: Form 172 is not a standalone filing – it goes with your Form 1040 (individual) or Form 1041 (estate/trust) for the year in which the NOL arose and for any year you are utilizing an NOL. For example, if you have an NOL in 2024, you fill out Form 172 for 2024 and attach it to your 2024 tax return (due April 15, 2025, unless extended). If you carry part of that NOL into 2025, then on your 2025 return you would also include a Form 172 (Part II filled in to show the carryforward usage). Essentially, any tax return that involves an NOL calculation or deduction should have the form attached so the IRS can see the details.
• Electronic filing: If you e-file, your tax software will include Form 172 data in the electronic submission. Make sure you complete the NOL section in the software; it will generate Form 172 automatically. Most major tax software began supporting Form 172 in early 2025 (since it’s new, there were some initial software release delays – professionals noted that some software didn’t have it ready until March 2025, causing a bit of a crunch for early filers, especially farmers with a March 1 deadline). Ensure your software is up to date with the latest forms. If e-filing, you don’t need to do anything special – just review the form in your PDF before sending to confirm it’s there and correct.
• Paper filing: If you’re filing a paper return, print out the completed Form 172 and attach it behind your Form 1040 (or 1041) and any other schedules. There’s no separate mailing address for Form 172; it goes to the same IRS service center where your main return goes. If you’re mailing a Form 1045 for a tentative carryback refund, attach Form 172 to that Form 1045 and mail to the address specified in the Form 1045 instructions (typically the IRS center that handles quick refunds). For amended returns (1040-X or 1041-X) claiming an NOL carryback, attach Form 172 to those as well.
• Deadlines: Form 172 itself doesn’t have a standalone deadline; it’s tied to your return’s deadline. So, file it by the due date (including extensions) of the return on which it’s required. One special deadline to remember: if using Form 1045 for a carryback refund, you must file Form 1045 within 1 year after the end of the NOL year. For example, a 2024 NOL carryback claim on Form 1045 is due by December 31, 2025. Missing that window means you’d have to file an amended return instead (which has a longer statute – typically 3 years from the original return – but the refund will come slower than a Form 1045 would).
• States: Don’t send Form 172 to state tax authorities – it’s a federal form. However, if your state allows NOLs, you may have to fill out a separate state NOL form or worksheet. Some states might accept a copy of the federal calculation as support, but generally each state has its own process (more on state differences later). When you prepare your state return, watch for NOL sections or forms; the federal Form 172 won’t automatically transfer to state calculations.
• Recordkeeping: Keep a copy of Form 172 and any related computations in your tax records for as long as the NOL is in play (and then some). The IRS advises retaining records for NOL years until 3 years after the NOL is fully used up (because an NOL can affect multiple years, you need to keep the source documentation longer than normal). This includes copies of returns for all years that the NOL touches. For example, if a 2024 NOL isn’t fully used until 2029, you should keep the 2024 through 2029 returns (and Form 172s) at least until 2032. Good documentation is your best defense if the IRS ever questions the NOL.

Key Terms and Concepts Related to Form 172

To navigate Form 172 and NOLs confidently, it helps to understand some important tax terms and their relationships. Below is a brief glossary of key terms in context:

• Net Operating Loss (NOL): The excess of allowable deductions over gross income in a tax year. In other words, a negative taxable income due to business losses or other qualifying deductions. NOLs can be carried to other years to reduce taxable income. Form 172 quantifies this amount for individuals, estates, and trusts.
• Carryforward: Using an NOL in a future year. After 2020, NOLs (other than farm losses) can only be carried forward. Carryforwards last indefinitely but can only offset up to 80% of taxable income in each future year.
• Carryback: Using an NOL in a prior year to claim a refund for taxes already paid. Generally eliminated for post-2020 NOLs except certain farming losses (2-year carryback). If available, carrybacks require either Form 1045 or an amended return, and careful timing.
• IRS Form 1045: Application for Tentative Refund. A form used to quickly claim a refund from carrying back an NOL (or certain tax credits). It’s faster than an amended return (the IRS typically issues a refund within 90 days if approved). Form 1045 must include Form 172 as supporting evidence of the NOL calculation and must be filed within 1 year of the NOL year’s end. Note: If an NOL carryback is not eligible or you miss the Form 1045 window, you’d use Form 1040-X (or 1041-X) to amend prior years instead.
• Employer Identification Number (EIN): A tax ID number for businesses, estates, and trusts. On Form 172, estates and trusts use an EIN in place of an SSN to identify the taxpayer. An individual will use their SSN. It’s important to use the correct number to match the entity that has the NOL.
• Tax Year vs. Fiscal Year: Most individuals use a calendar tax year (Jan–Dec). Form 172 has a space to enter the tax year or fiscal year. Fiscal year filers (mostly some trusts or very rarely an individual with IRS approval) will enter the year ending date. This is simply to align the NOL with the correct period. Ensure the right year is on the form to avoid any confusion with multiple NOLs.
• Excess Business Loss (EBL): A limitation (applicable to 2018–2025) on the deduction of business losses in the current year, for non-corporate taxpayers. If your business losses exceed $313,000 (single) or $626,000 (joint) in 2025 (limits vary by year), the excess can’t be deducted currently and instead becomes part of your NOL carryforward. In practice, Form 461 computes EBL, and any disallowed amount feeds into Form 172 as part of the NOL. Essentially, EBL rules force very large losses to be used in future years via NOL treatment.
• Modified Taxable Income: A term used in NOL calculations, especially in Part II. It refers to taxable income recomputed without certain deductions (like NOLs themselves, QBI deduction, etc.), used to figure how much NOL can be used in a year. For instance, the 80% rule uses modified taxable income (taxable income before NOL deduction) to gauge the limit.
• Section 172 of the IRC: The section of the Internal Revenue Code governing NOLs. Interesting trivia – Form 172 is numbered after IRC §172. This section outlines how NOLs are defined and the carryback/carryforward rules. Tax professionals often refer to “Section 172(b) carrybacks” or “172(f) farming loss” etc., which correspond to these rules.
• CPA / Tax Professional: Certified Public Accountants or other tax preparers who often assist with complex forms like Form 172. If your NOL is large or spans many years, involving a CPA can help ensure calculations are correct. They can also help strategize carryback vs carryforward decisions and deal with any IRS correspondence. The relationship here is that CPAs use Form 172 as a tool to serve their clients’ tax planning needs, and the IRS expects professional accuracy – so if in doubt, consulting a pro can save headaches.
• IRS Deadlines & Penalties: While not a term, it’s worth noting: failing to adhere to the rules around NOLs can trigger penalties. For example, if an NOL is overstated and leads to underpayment of tax in a carryforward year, the IRS can impose an accuracy-related penalty (generally 20% of the underpaid tax) for negligence or substantial understatement. There’s no specific penalty for “not filing Form 172,” but the consequence would be your NOL claim could be denied, resulting in more tax, interest on the underpayment, and possible penalties. Always file Form 172 when required and follow the carryback deadlines (1 year for Form 1045, 3 years for amended returns) to claim refunds, or you could lose the refund.

Understanding these concepts helps you not only fill out the form correctly but also communicate clearly if you need to discuss your tax situation with the IRS or a tax advisor. For instance, knowing what a “carryover” is vs a “carryback” will make the Form 172 instructions much easier to follow.

Common Mistakes to Avoid When Dealing with Form 172

Filling out an NOL form can be tricky, and there are several pitfalls to watch out for. Here are some common mistakes and misconceptions related to Form 172 and NOLs – and how to avoid them:

• ❌ Mistake: Forgetting to include Form 172 with your return. If you have an NOL, don’t just write a number on your 1040 and call it a day. The IRS requires the detailed computation. Solution: Always attach Form 172 to the tax return for the NOL year, and for any year you claim an NOL deduction. This substantiates your claim. Without it, the IRS might disallow the deduction and send you a notice. Remember, a tax return claiming an NOL carryforward should have Form 172 showing where that number came from.
• ❌ Mistake: Assuming all negative income is an NOL. Not every loss on your 1040 translates to an NOL. For example, a large capital loss might make your taxable income negative, but for NOL purposes the excess capital loss is not counted. Solution: Use Form 172 Part I to do the proper adjustments. This will force you to add back things like excess capital losses or nonbusiness deductions. Many people who try to eyeball their NOL get it wrong – let the form (or tax software) do it. Always check Line 21 of Part I; that is the actual allowed NOL. It might be smaller than the negative income you initially calculated due to those adjustments.
• ❌ Mistake: Not considering the 80% limitation in future years. Say you have a $100,000 NOL carryforward. You might think, “If I earn $100,000 next year, I won’t pay tax because I have a 100k loss.” But the 80% rule would limit your deduction to 80k if that next year’s taxable income is 100k. Solution: When planning or making estimated taxes, remember you can’t wipe out 100% of taxable income with a new NOL (post-2017 NOL). Plan for at least 20% of your income being taxable if you’re solely using post-2017 NOLs. If you had older NOLs (pre-2018) they can fully offset, but those are increasingly rare as years pass.
• ❌ Mistake: Missing the carryback opportunity or deadline. This one mostly hits farmers or those with special carryback provisions. If you do have a carryback, say a 2024 farm NOL, and you want that quick refund, you must file Form 1045 by end of 2025 or an amended return within 3 years. Solution: Mark your calendar and act promptly. If you’re a farmer with an NOL, decide to carry back or not when filing that year’s return (and attach the waiver if forgoing). If carrying back, get the Form 1045 in on time. Missing it doesn’t forfeit the NOL, but it means you can only carry forward – losing the chance for an immediate refund.
• ❌ Mistake: Carrying back when not allowed. Some taxpayers unaware of the law change try to carry back a regular NOL (non-farm) from say 2024 to 2022. The IRS will reject that; since TCJA, it’s not permitted (again, except farms). Solution: Know the rules or consult them. Generally, if it’s not a farm or specified exception, assume no carryback. All your NOL goes forward. If you mistakenly claim a refund by carrying back ineligible NOL, the IRS will disallow it, causing delays and possibly amended return work to fix the error.
• ❌ Mistake: Failing to maintain NOL documentation. NOLs can span decades. If you don’t keep track, you could lose the proof of your original loss or how much was used. This is exactly what happened in some tax court cases (discussed below) – people claimed old NOLs but had no records to back them up. Solution: Keep a dedicated file for NOLs. In it, have a copy of the return from the NOL year (with Form 172 and any schedules showing the loss, e.g. business schedules), and then a summary of usage year by year (with each year’s Form 172 or computations). When you fully absorb the NOL, notate that. This way, if the IRS ever asks “show us how you got this NOL carryover,” you can pull out that file and have everything at the ready.
• ❌ Mistake: Ignoring state NOL differences. You might correctly do your federal NOL and then assume the state will just follow along. That’s not always true; many states have their own NOL rules. Solution: Always prepare the state return separately with respect to NOL. Some states require adding back the federal NOL and using a state-calculated NOL instead. Others conform partly but with time limits. Check your state’s tax instructions or consult a CPA knowledgeable in your state. (More on state differences in the next section.)
• ❌ Mistake: Overlooking form instructions and updates. Form 172 is new, and the IRS occasionally updates instructions or issues clarifications. Solution: When in doubt, read the official Instructions for Form 172 (available on IRS.gov). They contain line-by-line guidance and examples. Also stay updated on any tax law changes (for instance, any extension or change to the 80% rule or EBL rule after 2025, as Congress could modify these). Using the most recent software or consulting current IRS publications can save you from using outdated rules.

By being aware of these common errors, you can double-check your work on Form 172 and avoid costly mistakes. When you finish filling it out, it’s wise to review Part I and II with a critical eye or have a tax professional review it if possible. Small errors in calculation can cascade into big tax differences when you carry an NOL forward several years. Accuracy is key!

Federal vs. State NOL Differences

When it comes to Net Operating Losses, state taxes often play by different rules than the federal system. After you’ve wrangled your NOL for IRS purposes, you should turn to your state return and see how (or if) that loss is handled there. Here are some general points and examples of how states differ:

• No automatic conformity: Some states automatically follow federal NOL rules, but many do not. For instance, a state might decouple from the federal changes made in 2017 (TCJA) or 2020 (CARES Act). This means the carryback/carryforward periods and limitations at the state level could be different. Example: Before 2018, federal allowed 2-year carryback/20-year carryforward. A state might still be using those old rules while federal has moved to no carryback/indefinite carryforward. Always check your state’s tax code or instructions for “Net Operating Loss” provisions.
• Carryforward periods and limits: States vary widely. Some states mirror the federal indefinite carryforward, while others cap it at, say, 20 years or some other number. A few states have no NOL provision for individuals at all (they might not allow personal NOLs, or only allow business losses to offset the same year’s income without carryover). Example: Pennsylvania historically did not allow NOL carryforwards for individuals (only for certain business entity types), effectively meaning PA residents couldn’t carry personal losses to other years. Illinois, on the other hand, conforms to many federal rules but at one point suspended the use of NOLs for a couple of tax years for budget reasons. California has its own twist: California does not permit NOL carrybacks at all, even for farms. It typically allows carryforwards up to 20 years. Additionally, CA has in the past temporarily suspended the use of NOL carryforwards for high-income taxpayers during budget crises (for example, California disallowed NOL deductions in certain years like 2020-2022 if income was above a threshold, then extended the period to use them later). As of 2024, CA again enacted a suspension of NOL usage for most taxpayers for 2024–2026 unless you meet a small business exception, but will extend the carryforward period so you don’t lose them. These kinds of rules mean your federal NOL might be on hold or different on the CA return.
• Different calculations: Some states require you to calculate the NOL starting from state taxable income, which can differ from federal because states might disallow certain deductions or treat income differently. Example: New York generally conforms but because NY starts with federal income and has addbacks, the NOL must be recomputed for state starting income. New Jersey has no personal income tax NOL for most cases (they don’t allow carryforwards of excess losses on the NJ return). Pennsylvania (for personal income tax) basically doesn’t allow carrying forward losses from one year’s business to the next year’s; losses can only offset income of the same year.
• Separate state NOL forms: If your state allows NOL carryover, there’s often a state form or worksheet. For example, California Form FTB 3805V is used to compute NOLs for individuals in CA. It will ask for your federal NOL as a starting point and then make state-specific adjustments. New York uses Form IT-201-ATT for certain adjustments, and might rely on federal figures for NOL but with modifications. Always attach any required state NOL form/worksheet to your state return. Don’t assume the federal Form 172 will suffice; the state likely won’t accept it alone because of differences.
• City/local taxes: A brief note – if you live in a locality with its own income tax (like New York City, or certain city taxes in Ohio, etc.), there may or may not be NOL provisions at that level. NYC, for instance, generally follows NY State for unincorporated business losses, but it gets complicated. Check local rules if applicable.

Bottom line: After you finish your federal taxes with Form 172, take a close look at your state tax instructions regarding NOLs. You might need to perform a separate calculation. The strategies can differ too – a state might not allow an NOL at all, meaning you pay state tax on income even though you had a federal NOL to offset your IRS tax. Or a state might have allowed a carryback where federal didn’t (rare, but theoretically if a state hadn’t adopted the TCJA changes). Planning is important: for example, if California suspends NOL use this year, you know you’ll still owe CA tax even though federally you paid none due to an NOL – that can affect your cash flow.

Keep records for state NOLs separately. They might start and end at different amounts than your federal. Many states that do allow NOLs will expect you to track the carryforward just like the IRS. Be prepared to show, if asked, how you got the state NOL figure. Typically, your state’s carryover will not match the federal exactly (due to different income starting points or partial conformities).

In summary, treat federal and state NOL as related but distinct tasks. The concept is the same – losses offset other years’ income – but the rules can be a whole different ballgame. If unsure, consult your state’s tax publications or a tax professional who knows your state’s laws.

Detailed Examples: Filling Out Form 172 in Common Scenarios

To make this concrete, let’s walk through three common scenarios and illustrate how Form 172 would be filled out and how the NOL plays out. We will use simplified numbers for clarity. Each scenario includes a brief description and a breakdown (with a small table) of key Form 172 entries or outcomes.

Example 1: Sole Proprietor Loss Carryforward (Individual with Business Loss)

Scenario: John is a single taxpayer who runs a small business (sole proprietorship). In 2024, his business had a loss of $50,000. Aside from the business, John earned $30,000 of wage income from a part-time job. He takes the standard deduction of $12,000 (for simplicity, assume $12k as a round figure). Because of the large business loss, John’s overall income is negative, indicating an NOL.

Let’s calculate John’s NOL using Form 172 Part I and see how it carries forward:

Form 172 Calculation	John’s 2024 Numbers
Wage Income (nonbusiness income)	$30,000
Business Loss (business deduction)	-$50,000
Standard Deduction (nonbusiness ded.)	-$12,000
Preliminary taxable income (30k – 12k – 50k)	-$32,000 (negative, suggests an NOL)
Nonbusiness deduction allowed against nonbusiness income	$30,000 (standard deduction is used up against wages)
Excess nonbusiness deduction -> added back	$0 (John’s $12k standard deduction is fully absorbed by $30k wages, so no excess to add back)
Capital loss adjustment	$0 (John has no capital losses)
Net Operating Loss (Line 21)	$32,000 NOL for 2024

Explanation: John’s wage income was not enough to cover his standard deduction plus business loss. Essentially, the $50k business loss drove his taxable income far below zero. On Form 172 Part I, John enters $30k income, $12k deduction, etc., and ends up with a $32k NOL (which is mostly the business loss minus the unused portion of the standard deduction; in this case, $20k of the business loss offset his wage income after standard deduction, and the remaining $30k of loss is what generated the NOL).

Because 2024 is not a farming year for John and he has no carryback option, the entire $32,000 NOL will be carried forward to 2025. John will attach Form 172 to his 2024 return showing this calculation. Line 10 of Part II will show $32,000 as the carryover to 2025.

Usage in the next year: In 2025, John finds a new job and has a high income, say $100,000 (and no big losses). He can use his $32,000 NOL carryforward on his 2025 return to reduce taxable income. However, the 80% rule applies: if his 2025 taxable income (pre-NOL) is $100k, he can use up to $80k of NOL. He only has $32k, so he’ll use all $32k. That will bring his taxable income down to $68k. He’ll fill out a new Form 172 for 2025 Part II indicating he used $32k of NOL and $0 remains for 2026. Essentially, John gets the full benefit of the $32k NOL in 2025 (it saves him taxes on $32k of income).

This example shows a straightforward case: a business loss creating an NOL, and the NOL simply carries forward to the next year to reduce taxes. There were no special adjustments needed beyond the standard deduction allocation.

Example 2: Farming Loss with Carryback (Applying NOL to Prior Years)

Scenario: Rose is a farmer who files jointly with her spouse. In 2024, they suffered a large farm net loss of $100,000 due to drought and rising costs. Aside from farming, they had no other income. Because this is a “farming loss,” they are eligible to carry the NOL back 2 years. They paid taxes in those prior years that they’d love to get refunded. Let’s say in 2022 and 2023 they had taxable incomes of $80,000 and $50,000 respectively (and paid taxes on those).

Rose and her spouse decide to carry back the NOL to get immediate refunds from 2022 and 2023. Here’s how the NOL is utilized:

NOL Carryback Process	Amount ($)
2024 farm NOL (from Form 172, Part I)	$100,000 NOL
Carry back to 2022 (first carryback year): – Taxable income in 2022 was $80,000. Apply NOL to fully offset.	-$80,000 used
Remaining NOL after 2022 carryback	$20,000 left
Carry back to 2023 (second carryback year): – Taxable income in 2023 was $50,000. Apply remaining NOL $20k (partially offsets 2023 income).	-$20,000 used
Remaining NOL after 2023	$0 left to carry forward
Refund outcomes: – 2022: All taxes paid on $80k income will be refunded. – 2023: NOL covered $20k of $50k income, so taxes on that $20k will be refunded (2023 still ends up with taxable $30k).	(Rose will file Form 1045 or amended returns to claim these refunds)

Explanation: Rose’s $100k NOL is first applied to 2022. It completely wipes out the $80k of taxable income from 2022, reducing it to zero. That uses $80k of the NOL, leaving $20k. Next, the remaining $20k is carried to 2023. In 2023, they had $50k of income; applying $20k NOL brings 2023’s taxable income down to $30k. There is no NOL left after that. Rose will not have any carryforward to 2025 in this scenario; she effectively used the entire NOL in prior years.

Filing steps: They will fill out Form 172 for 2024 showing the $100k NOL on Part I. In Part II, they’ll have a column for 2022 and 2023. After completing it, Form 172 will show that $80k went to 2022, $20k to 2023, and $0 to carry forward. Rose will attach this Form 172 to a Form 1045 (or two Form 1040-Xs) when claiming the refund for 2022 and 2023. The Form 1045 will have schedules where they enter -$80,000 on 2022’s line and -$20,000 on 2023’s line for NOL deduction, resulting in recalculated tax for those years. The IRS will review and issue refunds for the overpaid tax in those years.

This example highlights the benefit of carryback for those who qualify: Rose recovered taxes from prior years, putting cash in hand shortly after the loss year – helpful for her farm’s cash flow. It also shows how Form 172 Part II orchestrates using the NOL in chronological order for carrybacks.

Example 3: Using an NOL Carryforward with the 80% Limit (Multiple-Year Carryforward)

Scenario: Xuan has a tech startup as a single filer. In 2024, she incurs a massive loss of $150,000 (startup costs, operating losses). She has no other income that year, so she ends up with a $150k NOL on Form 172. She cannot carry it back (not a farm, and it’s 2024). This NOL will carry forward. Fast forward to 2025: Xuan’s business turns a profit and her taxable income (before NOL) is $100,000. How much of the $150k NOL can she use in 2025, and what happens to the rest?

Let’s illustrate the usage with the 80% rule in play:

NOL Carryforward Usage	Amount ($)
2024 NOL available (carryforward)	$150,000
2025 taxable income (pre-NOL)	$100,000
Maximum NOL usable in 2025 (80% of $100k)	$80,000
NOL applied in 2025	-$80,000
2025 taxable income after NOL	$20,000 (Xuan still pays tax on $20k because of 80% limit)
Remaining NOL after 2025	$70,000 (150k – 80k used)
Carryforward NOL to 2026	$70,000

Explanation: Even though Xuan had $150k of loss to use, the tax law prevents her from using more than $80k of it in 2025 (since $100k * 80% = $80k). She will still have to report $20k of taxable income in 2025 and pay tax on that portion. She will carry the unused $70k forward to 2026.

On Xuan’s 2025 return, she’ll fill out Form 172 Part II. Line 2 (2025 column) would show $100k of income before NOL. Line 1 she would enter $80k as the NOL deduction (that’s the max allowed). The form will then show Line 10: $70k carried to 2026. She’ll attach that form to her 2025 return to substantiate why she deducted $80k and have $70k left. Then in 2026, she can use that $70k (again up to 80% of whatever her 2026 income is).

This example demonstrates how large NOLs can extend over multiple years due to the usage cap. Xuan won’t fully utilize her 2024 loss until perhaps 2026 or later, depending on her future incomes. Each year she’ll use up to 80% of her taxable income in NOL deduction until the $150k is exhausted. If 2026 income is, say, $200k, she can use the full $70k (since that’s well under 80% of 200k), and then finally the NOL is gone. If her income was lower, the 80% cap would use less and she’d carry some to 2027 as well.

Lessons from Tax Court: NOL Disputes and Penalties

Claiming an NOL can invite scrutiny from the IRS, especially if the amounts are large or carried over many years. Taxpayers have ended up in court over NOL issues – usually due to poor documentation or misunderstandings of the rules. Here are a couple of real-world case insights that underscore the importance of “doing it right”:

• Recordkeeping is critical – the case of the missing proof: In Amos v. Commissioner (T.C. Memo 2022-109), a taxpayer (who was actually a CPA) claimed multimillion-dollar NOL carryforwards stemming from losses in the late 1990s through 2011, which she then used on her 2014 and 2015 returns. The IRS challenged these NOLs. In Tax Court, the burden of proof was on the taxpayer to show the NOLs were valid – meaning she had to prove the losses occurred and that they weren’t already used up in intervening years. Unfortunately for her, she could not produce sufficient records from the older years to substantiate the original losses (some over 15 years old) nor the calculations of how much should be left to carry forward. The Tax Court disallowed her claimed NOL deductions entirely. To add pain, they also upheld a 20% accuracy-related penalty for negligence, because she, as a tax professional, should have known to keep records and wasn’t able to show she acted with reasonable cause. Lesson: If you’re carrying losses forward year after year, keep all supporting documents (tax returns, schedules, financial records) for those losses. Simply referring to an old tax return’s number is not enough – you need proof of the underlying loss and a clear trail of how it was applied each year. The IRS and courts will not just “take your word for it” that you have an NOL; you must substantiate it.
• Must establish the NOL and its usage: In Villanueva v. Commissioner (T.C. Memo 2022-27), a similar issue arose – the taxpayer tried to claim NOL carryforwards but failed to demonstrate that those losses were actually incurred and still available. The court reiterated a key point: A taxpayer who claims an NOL deduction bears the burden of establishing both the existence of the NOL in the earlier year and the amount that is available to carry to the year in question. In short, you have to not only show “I had a loss in Year X of $Y” but also “Here is how much of that $Y was used (or not used) in each subsequent year up to the year I’m claiming it.” If you leave gaps or if the numbers don’t tie out, the IRS can disallow the deduction. Lesson: Maintain a schedule of your NOL carryover activity. Many tax software packages will do this automatically – they produce an NOL carryover worksheet showing each year’s start balance, amount used, and end balance. Keep those printouts. If you change tax software or preparers, make sure the NOL info carries over correctly. Any discrepancy could raise questions down the line.
• Penalties can apply for NOL mistakes: The IRS can assert accuracy-related penalties (20% of the underpaid tax) if an NOL deduction is claimed erroneously. This could be due to negligence (not following rules or carelessly failing to substantiate) or substantial understatement of tax (if the NOL was a big chunk that shouldn’t have been claimed). The Tax Court has upheld such penalties when taxpayers couldn’t demonstrate they were careful and reasonable. On the flip side, if you can show you acted in good faith and had reasonable cause – for instance, you relied on professional advice or had some documentation (just maybe not enough by court standards, but you tried) – you might escape penalties even if the IRS disagrees with your NOL. But don’t count on it; it’s better to avoid the situation entirely by being meticulous.
• Beware of interaction with other tax quirks: One thing that can come up – if you carry back an NOL, it can affect things like Alternative Minimum Tax or, as noted in IRS guidance, even the computation of certain credits. For example, carrying an NOL to 2021 could retroactively alter whether someone received too much Advance Child Tax Credit (because it lowers AGI for that past year, potentially changing a safe-harbor threshold). While this is an uncommon complexity, it highlights that NOLs reverberate through your tax profile. The IRS cautions about these scenarios in Form 172 instructions. Lesson: Consult the instructions or a tax pro when your NOL spans tricky areas (like AMT years or years with special credits), to ensure you handle any collateral changes.

In summary, the courts have consistently reminded taxpayers: treat NOLs with care. They’re not a free-for-all; you must follow the rules and keep evidence. If you do, NOLs are a powerful tax-saving tool. If you don’t, you could lose the deduction and get hit with penalties. Remember that Form 172 itself is part of building that evidence – it’s a concise statement of the NOL and all pertinent facts, which the IRS regulations actually require you to file when claiming an NOL. By preparing it thoroughly and keeping it on record, you’re meeting that requirement and putting yourself in a defensible position should the IRS ever ask questions about your losses.

FAQs

Q: Yes or No – Do I need to file Form 172 if I have a net operating loss?
A: Yes. If you determine that you have an NOL for the year (deductions exceed income), you should include Form 172 with your tax return to claim and document that NOL for carryforward or carryback.

Q: Yes or No – Can I carry back my NOL to get a refund from previous years?
A: No (in most cases). For NOLs in tax years after 2020, carrybacks are not allowed except for certain farm losses (which can be carried back 2 years). Most taxpayers will only carry NOLs forward.

Q: Yes or No – Does Form 172 get filed separately from my 1040?
A: No. Include Form 172 as part of your tax return (attached to Form 1040 or 1041). It’s not a standalone filing – the IRS will receive it with your return or with any amended return or refund claim involving an NOL.

Q: Yes or No – Will my tax software automatically handle Form 172?
A: Yes. Most updated tax software for 2024+ will generate Form 172 once you input your income and deductions. Always review the form’s output for accuracy, but the software should do the heavy lifting.

Q: Yes or No – Is there a penalty for not filing Form 172?
A: No (not a separate penalty). However, failing to file it means the IRS can disallow your NOL deduction due to lack of support. That could lead to a higher tax bill, interest, and potential accuracy-related penalties on the underpayment.

Q: Yes or No – Do NOL rules vary by state?
A: Yes. State treatment of NOLs often differs from federal rules. Some states have no NOLs for individuals, others have different carryforward limits or disallow carrybacks. Always check your state’s guidelines separately.

Q: Yes or No – Can a corporation use Form 172 for its NOL?
A: No. Form 172 is only for individuals, estates, and trusts. C-corporations have their own NOL rules and typically use schedules on Form 1120 and Form 1139 for carrybacks.

Q: Yes or No – If my NOL is small, can I skip claiming it?
A: Yes, technically you can choose not to claim an NOL (by not filing Form 172). But it’s usually not wise – you’d be leaving tax benefits on the table. If you don’t claim it on time, you generally can’t use it later.

Q: Yes or No – Does an NOL carryforward automatically apply next year?
A: No. You must actively claim the NOL carryforward on your next year’s return. It isn’t automatic – you’ll use Form 172 (Part II) on that return to apply the carryforward amount against your income.

Q: Yes or No – Should I consult a tax professional for large NOLs?
A: Yes. If you have a significant NOL or one that spans many years, a CPA or tax professional can ensure calculations are correct, help with strategy (carryback vs. carryforward), and handle any complex interactions with other tax provisions.