IRS Form 172 – If you’re dealing with tax situations where your deductions exceed your income, you might qualify for a net operating loss (NOL). This can provide significant tax relief by allowing you to offset income in other years. IRS Form 172 is the key document for calculating and managing NOLs specifically for individuals, estates, and trusts. In this comprehensive guide, we’ll explore what Form 172 is, how to use it, the rules for NOL carrybacks and carryforwards, and recent updates to ensure you’re using the most current information.
What Is a Net Operating Loss (NOL)?
A net operating loss occurs when your allowable tax deductions for a year surpass your taxable income. Essentially, it’s a financial loss that the IRS recognizes for tax purposes, enabling you to reduce your tax liability in prior or future years. NOLs are governed by Internal Revenue Code (IRC) Section 172, which defines the net operating loss deduction and outlines how losses can be carried back to earlier years or forward to future ones.
For individuals, this often stems from business activities, such as self-employment or rental properties, where expenses outpace revenue. Estates and trusts can also generate NOLs from their operations or investments. Unlike corporations, which use Form 1120 for NOLs, non-corporate taxpayers now rely on Form 172 to compute these losses.
Key point: Not all losses qualify as NOLs. Personal expenses or hobby losses don’t count—only those related to trade, business, or income-producing activities.
Introduction to IRS Form 172
Released in December 2024, Form 172 is a dedicated IRS form for figuring NOLs for individuals, estates, and trusts. Prior to this, taxpayers used worksheets in Publication 536, but the IRS has streamlined the process with this new form. It’s available as a PDF download from the IRS website: https://www.irs.gov/pub/irs-pdf/f172.pdf.
The form is divided into two main parts:
- Part I: NOL Calculation – This section helps you determine if you have an NOL for the current tax year by adjusting your taxable income for nonbusiness deductions, capital gains/losses, and other items.
- Part II: NOL Carryover – Here, you calculate how much of the NOL can be carried to future years after applying it to the current or prior years.
Form 172 must be attached to your tax return (e.g., Form 1040 for individuals or Form 1041 for estates and trusts) if you’re claiming an NOL deduction.
How to Calculate an NOL Using Form 172?
Calculating an NOL involves several steps to ensure only qualifying losses are included. Here’s a high-level overview based on the form’s instructions:
- Start with Adjusted Gross Income (AGI) or Taxable Income: For individuals, subtract your standard or itemized deductions from AGI. For estates and trusts, adjust taxable income by adding back charitable deductions, income distribution deductions, and exemptions (Line 1).
- Account for Nonbusiness Items: Enter nonbusiness capital losses and gains (Lines 2-5), then nonbusiness deductions and income (Lines 6-10). This separates personal items from business-related ones.
- Incorporate Business Capital Losses: Add business capital losses and gains (Lines 11-15).
- Handle Capital Loss Limitations: Adjust for any Schedule D losses, Section 1202 exclusions (qualified small business stock), and the $3,000 capital loss limit for individuals (Lines 16-22).
- Subtract Prior NOL Deductions: Enter any NOLs from previous years as a positive number (Line 23).
- Final NOL Amount: Combine the lines to get your NOL (Line 24). If positive or zero, no NOL exists.
For carryovers in Part II, you’ll recompute taxable income for subsequent years, applying the NOL deduction while considering limitations.
Tip: Use the accompanying Instructions for Form 172 (available at https://www.irs.gov/pub/irs-pdf/i172.pdf) for detailed line-by-line guidance.
NOL Carryback and Carryforward Rules
Under IRC Section 172, NOLs can be carried back to prior years for a refund or carried forward indefinitely to offset future income. However, rules vary by when the loss occurred:
- Pre-2018 NOLs: Can be carried back 2 years and forward 20 years, without the 80% limitation.
- Post-2017 NOLs: Generally no carryback (except for farming losses, which can carry back 2 years), but indefinite carryforward. Limited to 80% of taxable income (computed without the NOL deduction, QBI deduction, or Section 250 deduction).
For tax years beginning after December 31, 2020, the 80% limit applies to post-2017 NOLs. You can elect to waive carryback by attaching a statement to your return.
Special rules apply to farming businesses (carryback up to 2 years) and non-life insurance companies.
Recent Changes and Updates for 2025 Tax Year
The creation of Form 172 in late 2024 marks a significant update, simplifying NOL computations previously handled via Publication 536 worksheets. As of 2026, ensure you’re using the latest version (December 2024) for accuracy.
CARES Act modifications temporarily allowed 5-year carrybacks for 2018-2020 NOLs, but those provisions have expired. Always check IRS.gov for inflation adjustments or legislative changes.
When to File Form 172 and Claim NOLs?
File Form 172 with your original return or an amended return (Form 1040-X) if claiming a carryback for a refund. The deadline for carryback claims is generally 3 years from the due date of the return for the loss year.
For quick refunds from carrybacks, consider Form 1045 (individuals) or Form 1041 (estates/trusts) instead of amending.
Common Mistakes to Avoid
- Including Non-Qualifying Deductions: Only business-related items count toward NOLs.
- Ignoring the 80% Limit: For post-2017 losses, don’t deduct more than 80% of modified taxable income.
- Missing Elections: Decide on carryback waivers promptly, as they’re irrevocable.
Consult a tax professional for complex situations, such as those involving pass-through entities or international income.
Conclusion
IRS Form 172 empowers individuals, estates, and trusts to leverage net operating losses for tax savings. By understanding NOL rules under Section 172 and properly completing the form, you can minimize your tax burden. Download the form and instructions from IRS.gov, and stay updated on changes. For personalized advice, reach out to a qualified tax advisor.
This article is for informational purposes only and not a substitute for professional tax advice.