Kingsfield · Research · Tax

Can a corporation carry forward a net operating loss to offset income in a future year?

Published 2026-06-23 · U.S. federal law

Section 172 allows a taxpayer a deduction equal to the net operating loss carryovers and carrybacks to the taxable year, subject to a percentage limit on taxable income.

The answer

The deduction

26 U.S.C. § 172(a) allows a deduction for the taxable year equal to the aggregate of the net operating loss carryovers plus carrybacks to that year, so a loss in one year can reduce income in another.

The 80 percent cap

The deduction is limited. For losses arising in years after 2017, Section 172(a) caps the NOL deduction at 80 percent of taxable income computed without regard to the deduction itself.

The judged input

What the AI drafted

Submitted to the judge

This is an excerpt from a draft tax planning memorandum — the kind of work product a lawyer generates with a legal-AI drafting tool, then has to stand behind. Kingsfield does not write it; it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.

AI draft excerpt — tax planning memorandum

The Company generated a net operating loss in the prior year and may apply it against this year's taxable income. Under 26 U.S.C. § 172(a), a taxpayer is allowed a deduction equal to the net operating loss carryovers and carrybacks to the taxable year, subject to the 80 percent of taxable income limitation. We note that the general authority permitting deduction of the loss in the year it is carried is 26 U.S.C. § 165.

The judge ruled on every citation as the draft used it — it accepted 26 U.S.C. § 172(a) and rejected 26 U.S.C. § 165. Here is why.

The verdict

How Kingsfield ruled

Ruled 2026-06-23

Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.

Accept26 U.S.C. § 172(a)

The draft claimed: A taxpayer is allowed a deduction for the taxable year equal to the aggregate of the net operating loss carryovers and carrybacks to that year, limited for post-2017 losses to 80 percent of taxable income.

“§ 172(a) There shall be allowed as a deduction for the taxable year an amount equal to—”

Cite found; proposition supported by the cited text.

Reject26 U.S.C. § 165

The draft claimed: Section 165 is the provision that allows a net operating loss to be carried over and deducted as an NOL deduction in a later taxable year.

Cite found, but the cited text does not support the claim. 26 U.S.C. 165 allows a deduction for losses sustained during the taxable year and not compensated by insurance; the net operating loss carryover deduction is at 26 U.S.C. 172. Regenerate with the correct authority.

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This page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.