Quick Answer
Yes, you can generally carry forward business losses indefinitely under NOL (Net Operating Loss) rules, but 2026 changes limit the deduction to 80% of taxable income. Prior losses from Schedule C businesses can offset current W-2 and freelance income, potentially saving thousands in taxes when your side hustle becomes profitable.
Best Answer
James Okafor, EA
W-2 employees whose side hustles had startup losses in previous years and are now becoming profitable
Understanding Net Operating Loss (NOL) carryforwards
When your side hustle loses money, those losses don't disappear — they create a Net Operating Loss (NOL) that can offset future income. Under current tax law, NOLs from 2021 and later can be carried forward indefinitely, but are limited to 80% of your taxable income in any given year.
Here's how it works for side hustlers:
Example: Side hustle startup losses paying off
Mike started freelance web design in 2023 while keeping his $75,000 W-2 job. His startup costs and low initial income created these results:
2023:
2024:
2025:
Key rules for NOL carryforwards
What qualifies:
What doesn't qualify:
The 80% limitation:
Starting with NOLs arising in 2021 and later, you can only use NOL carryforwards to offset up to 80% of your current year taxable income. This means if your 2026 taxable income is $100,000, you can use at most $80,000 of prior NOLs, leaving $20,000 in taxable income.
Strategic planning with NOL carryforwards
Income timing: If you have large NOLs, consider accelerating income into years where you can use them effectively. For example, if you're planning a large freelance project, timing it when you have NOL capacity can maximize tax benefits.
Retirement contributions: Since NOLs reduce taxable income, not AGI, maximizing 401(k) and IRA contributions can help you stay under income thresholds while still benefiting from NOL deductions.
State tax considerations: NOL rules vary significantly by state. Some states don't allow NOL carryforwards, while others have different limitation periods or percentages.
How to claim your NOL carryforward
You don't need to file anything special to preserve NOLs — they're automatically calculated when you file your return. To use NOL carryforwards:
1. Complete Form 1045 (Application for Tentative Refund) or wait for your regular return
2. The NOL deduction appears on Schedule 1, Line 8b
3. Attach Form 8825 if claiming NOL from rental real estate
4. Keep detailed records of NOL calculations and carryforward amounts
What you should do
Review your tax returns from the past 3-5 years to identify any NOL carryforwards you might have. If your side hustle had startup losses and is now profitable, you could be sitting on valuable tax savings. Use our freelance dashboard to track current year income and estimate how much NOL you can effectively use.
Key takeaway: Business losses from previous years can offset up to 80% of current taxable income indefinitely, potentially saving thousands when your side hustle becomes profitable.
Key Takeaway: Business losses from previous years can offset up to 80% of current taxable income indefinitely, making startup losses valuable long-term tax assets.
NOL carryforward rules comparison for different loss years
| Loss Year | Carryforward Period | Annual Limitation | Carryback Allowed |
|---|---|---|---|
| 2017 and earlier | 20 years | 100% of taxable income | Yes (2 years) |
| 2018-2020 | Indefinite | 100% of taxable income | No* |
| 2021 and later | Indefinite | 80% of taxable income | No |
| 2020 only | Indefinite | 100% of taxable income | Yes (5 years, CARES Act) |
More Perspectives
Priya Sharma, CPA
Established freelancers with significant income who may have NOLs from earlier lean years or business investments
Maximizing NOL value at higher income levels
As a high-earning freelancer, your NOL carryforwards become more valuable because they offset income taxed at higher marginal rates. A $20,000 NOL saves roughly $4,400-$7,400 in federal taxes (22%-37% brackets) plus state taxes, compared to $2,000-$2,400 for someone in the 10%-12% brackets.
The 80% limitation strategy
The 80% limitation means you can't zero out your taxable income entirely with NOLs. At your income level, this creates planning opportunities:
For example, if you have $50,000 in NOL carryforwards and $200,000 in taxable income, you can only use $160,000 of NOL (80% × $200,000). The remaining NOL carries forward another year.
Key takeaway: High earners should coordinate NOL usage with other tax strategies to maximize the value of each dollar of carryforward deduction.
Key Takeaway: High earners should coordinate NOL usage with other tax strategies to maximize the value of each dollar of carryforward deduction.
James Okafor, EA
W-2 employees just starting side businesses who want to understand how startup losses will benefit them long-term
Understanding startup loss benefits
As a new side hustler, your startup losses provide immediate tax relief by reducing your W-2 tax liability, plus long-term benefits if losses exceed your other income. The key is maintaining proper records and ensuring your activity qualifies as a business (profit motive) rather than a hobby.
Building your NOL foundation
Even small losses add up over time. If your side hustle loses $5,000 in Year 1, $3,000 in Year 2, and breaks even in Year 3, you have $8,000 in cumulative losses to offset Year 4's profits. This effectively gives you $8,000 in tax-free income when your business becomes profitable.
Documentation requirements
To preserve your NOL carryforward benefits:
The IRS presumes profit motive if you show profit in 3 of 5 years, but losses in early years are normal and expected for legitimate startups.
Key takeaway: New side hustlers should view startup losses as future tax assets that will offset income when the business becomes profitable.
Key Takeaway: New side hustlers should view startup losses as future tax assets that will offset income when the business becomes profitable.
Sources
- IRC Section 172 — Net Operating Loss Deduction
- IRS Publication 536 — Net Operating Losses for Individuals, Estates, and Trusts
Related Questions
Reviewed by James Okafor, EA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.