NOL Carryforward for Startups: Section 382 After Funding Rounds

How does a C corporation's net operating loss carry forward, and for how long?

A net operating loss (NOL) from a tax year beginning after 2017 carries forward to every later year with no expiry date. In a profitable year it can offset at most 80% of taxable income, and it cannot be carried back for a refund (26 USC 172). The loss belongs to the corporation; it never passes to the founders' personal returns.

A startup's case stops being simple when:

• funding rounds, SAFE conversions or share sales add up to an ownership change under section 382, which caps how much old loss each year can use;
• the company is being acquired, merged or is selling its assets;
• it files in a state that suspends or limits loss deductions, such as California;
• it is still choosing how to deduct research costs, which changes the size of the loss.

Gather each year's filed Form 1120, the loss each year produced and used, the cap table history, every stock issue, conversion and transfer with its date and price, and the board minutes approving each round.

Can a startup carry a loss back for a refund?

No. Only farming losses and losses of certain insurance companies can be carried back, for two years (Form 1120 instructions). A startup's loss waits for future profit. That makes the loss an asset only if the company earns taxable income later and keeps the loss usable through rounds and a sale.

Why can old losses offset only 80% of income in a profitable year?

Section 172 caps the deduction for losses from tax years beginning after 2017 at 80% of taxable income, figured before the NOL deduction itself and before the section 199A and 250 deductions (26 USC 172(a)(2)). So a first profitable year usually still owes federal tax at 21% on the remaining share, even with large old losses.

The unused loss is not lost: it carries to the next year. Losses from tax years beginning before 2018 are not under the cap and are used first. Federal estimated tax for that profitable year must account for the income the cap leaves taxable; see how C corporations are taxed.

Where do the losses show on Form 1120?

A current-year loss shows as a negative amount on line 30, taxable income. In a later year, line 29a takes the NOL deduction, Schedule K item 12 reports the carryover, and a statement shows the computation (Form 1120 instructions).

The section 1.382-11 statement lists the dates of owner shifts, the date of any ownership change, and the losses that made the company a loss corporation (26 CFR 1.382-11). For the rest of a first-year return, see the first corporate return for a pre-revenue startup.

Does a priced round cause a section 382 ownership change?

One round alone may not, but rounds add up. A section 382 ownership change happens when the stock owned by 5% shareholders has risen by more than 50 percentage points over their lowest ownership during the testing period, generally the three years ending on the transaction date (26 USC 382(g) and (i)). A Series A followed by a Series B within three years can pass that line.

The test runs on every owner shift: any change in ownership that moves the stake of someone who holds 5% or more before or after it.

• Who counts: each holder of 5% or more at any time in the testing period (26 USC 382(k)(7)). Smaller holders are grouped and the group is treated as one 5% shareholder.
• New issues to small holders still count: when the company issues stock to people who each hold less than 5%, the regulations generally treat them as a new group that counts as a 5% shareholder, even if the group is smaller (26 CFR 1.382-2T(j)(2)).
• By value, not share count: ownership percentages are measured by value (26 USC 382(k)(6)(C)), so a preferred share bought at a high price weighs more than a founder's common share.
• Preferred stock counts: venture preferred that converts or shares in growth is stock. Generally only plain nonvoting, nonconvertible preferred described in section 1504(a)(4) is left out (26 USC 382(k)(6)(A)).
• Founders' decreases do not count: only increases count, so founders being diluted does not reduce the total; the new investors' gains do the work.
• The clock restarts: after an ownership change, the next testing period begins the day after the change date.

Do SAFEs, options and secondary sales count toward the change?

Stock that is actually issued or sold counts; rights to get stock later generally do not, until they turn into stock. The regulations treat an option as exercised only if it meets one of three tests, each requiring that a principal purpose of it was to avoid or soften the impact of an ownership change (26 CFR 1.382-4(d)).

SAFEs: no statute, regulation or IRS ruling says whether a SAFE is stock or an option for section 382. The option regulations cover any "contract to acquire stock" or similar interest, but whether a particular SAFE is stock under general tax principles depends on its terms. Treat the SAFE's status as a judgment call to document, not a settled rule.

How much loss can we use each year after an ownership change?

After an ownership change, the yearly cap on pre-change losses equals the value of the company's stock just before the change times the long-term tax-exempt rate (26 USC 382(b) and (e)). The rate is the highest of the three months ending with the month of the change; for changes in October it is 3.95% (Rev. Rul. 2026-19). The IRS publishes each month's rate on its applicable federal rates page.

The losses still carry forward without expiry; the cap only slows their use. The 80% limit applies on top of it. Rules that change the number:

Whether raised cash counts as an investment asset depends on how it is held and used. Interest on that cash can also bring personal holding company tax, which old losses do not reduce; only the prior year's loss does (26 USC 545(b)(4)). See interest on a startup's raised cash.

Do research credit carryforwards face the same limit?

Yes. Section 383 limits unused general business credits, which include the research credit, to the tax on the part of the section 382 cap left after the losses use it (26 USC 383). An unused research credit carries back one year and forward 20 years (26 USC 39), so unlike post-2017 losses, it can expire while it waits.

A qualified small business can instead use part of the research credit against payroll tax; see the research credit against payroll tax.

What happens to our losses when the company is acquired?

In a stock purchase or merger, the losses usually stay with the company or move to the buyer, but the deal is almost always an ownership change, so section 382 caps their use from then on. In an asset sale, the losses stay with the selling company.

A buyer can use the losses only at the capped yearly rate, so their worth to a buyer depends on that cap, not their face amount. Their review of the losses is covered in tax clean-up before selling your startup; using losses against the gain in a wind-down is covered in returning cash to investors when a startup closes.

Do states follow the federal rules, such as California's suspension?

Not uniformly. Each state sets its own carryforward period and limits, so a loss can be usable federally and blocked, or expiring, in a state. California is the main example for startups.

California suspended the NOL deduction for tax years beginning in 2024 through 2026. A corporation whose income subject to California tax is less than $1 million is not affected (FTB: net operating loss). Losses are still computed and carried over during the suspension, and the carryover period is extended for the suspended years. California's own carryover period for losses since 2008 is 20 years, not unlimited (FTB 3805Q instructions).

For which states a startup files in at all, see business income tax in other states.

Do we need a section 382 study, and what records does it take?

A section 382 study is the analysis that tests every owner shift for an ownership change and, if one happened, computes the cap. No IRS form requires one by name, but a loss corporation must file the section 1.382-11 statement each year it has an owner shift, and it needs the study's answers before using old losses in a profitable year or when a buyer asks.

Order of work:

1. List every testing date: each round closing, SAFE or note conversion, option exercise, repurchase and secondary sale.
2. Identify each 5% shareholder by value at each date, and the groups of smaller holders.
3. Find the lowest stake in the three-year testing period and test for an increase of more than 50 percentage points.
4. If a change happened, value the stock just before it, apply the month's rate and the adjustments above.
5. Record the result in the return's section 1.382-11 statement and in the loss schedule.

Records to gather: the cap table history with every issue, transfer and conversion; round documents with prices per share; SAFE, note and option terms; 409A or other valuations; balance sheets showing cash and investments at each change; and every filed Form 1120 with its loss schedule.

Example

These examples are illustrative and use US dollars. They ignore state tax unless stated.

Three loss years, then a profitable year

The losses are from tax years beginning after 2017, and no ownership change has happened.

In year 4 the loss offsets 80% of income, so $200,000 is taxed at 21%: $42,000. The remaining $2,200,000 carries to year 5.

Series A and B move 55 points

Founders own all the stock. Within three years, Series A investors end up with 15% by value and Series B investors with 40%. Their combined increase is 55 percentage points, more than 50, so the B closing is an ownership change. The company has $8,000,000 of losses and is worth $20,000,000 just before the B, not counting the B's own cash, and less than a third of its assets are held for investment. At an illustrative 3.5% rate, about $700,000 of the old losses can be used each year, still subject to the 80% limit. If the company earns less than $700,000 in a year, the unused cap adds to the next year's cap.

California company earning $1,500,000

A C corporation with $2,000,000 of old losses and no ownership change earns $1,500,000 in a tax year beginning in 2026, all of it subject to California tax. Federally it deducts $1,200,000 (80%) and is taxed on $300,000. California suspends its NOL deduction because income is above $1 million, so California taxes the full $1,500,000. The California loss carries over, with its carryover period extended.

Different for you?

• Your loss is from an LLC, partnership or S corporation and you want it on your personal return: see business losses.
• You have not yet filed the first Form 1120: see the first corporate return for a pre-revenue startup.
• You are deciding whether to deduct research costs now or spread them over 60 months: see deducting US software development costs.
• You would rather use the research credit against payroll tax: see the research credit against payroll tax.
• A buyer is reviewing your losses or asking for a section 382 study: see tax clean-up before selling your startup and get corporate tax help.
• Rounds, SAFE conversions or secondary sales may add up to an ownership change, or the company is profitable and about to use its losses: get corporate tax help.
• The company is winding down or selling its assets: see returning cash to investors when a startup closes.