S Corporation Net Operating Loss (NOL): Rules, Limits & How to Use Them - (2025) Guide. A Complete Guide by Z-Tax & Accounting

What Is a Net Operating Loss (NOL) for an S Corporation?

A Net Operating Loss (NOL) occurs when an S corporation’s tax-deductible business expenses exceed its taxable income. Unlike C corporations, which can carry NOLs forward at the corporate level, S corporations do not keep NOLs themselves.

Instead, the loss passes through to shareholders, who then may deduct it on their personal tax returns—if they meet certain IRS requirements.

How S Corporation NOLs Pass Through to Shareholders

S corporation losses pass through based on ownership percentage. Each shareholder receives a portion of the NOL that they may use to offset other income, such as:

• W-2 wages
  
  

• Business income
  
  

• Rental income
  
  

• Capital gains
  
  

• Other passthrough income
  
  

But shareholders can deduct losses only up to their basis.

The IRS limits S Corp losses through three key rules:

1. Stock Basis Limitation
   
   

2. Debt Basis Limitation
   
   

3. At-Risk Rules (IRC §465)
   
   

Shareholders must satisfy all three to deduct the loss.

1. Stock Basis Limitation

Shareholders can only deduct losses up to their stock basis, which includes:

• Initial investment
  
  

• Additional capital contributions
  
  

• Their share of S Corp income
  
  

Distributions reduce basis.

2. Debt Basis Limitation

If stock basis is exhausted, shareholders can deduct losses against debt basis, which includes:

• Shareholder loans made directly to the S corp
  
  

• Not guarantees of third-party loans
  
  

• Not funds loaned through another entity
  
  

Debt basis is restored only when new repayments or new loans occur.

3. At-Risk Rules

Even if a shareholder has basis, they must also be “at-risk” for the amount.
This generally includes:

• Money invested
  
  

• Personal loans used to fund the business
  
  

But nonrecourse loans typically don’t qualify.

How NOL Carryforwards Work on Shareholder Returns

Once an S Corp loss flows through to shareholders, it becomes a personal NOL for tax purposes.

Under current IRS rules (as of 2025):

• NOLs can be carried forward indefinitely
  
  

• NOLs can offset up to 80% of taxable income in future years
  
  

• Carrybacks are generally not allowed (exceptions apply for certain farming businesses)
  
  

Example of S Corporation NOL

Scenario:

• S Corp has a $200,000 net operating loss
  
  

• Two equal shareholders
  
  

• Each receives a $100,000 pass-through loss
  
  

If Shareholder A has:

• $70,000 basis → they can deduct $70,000
  
  

• Remaining $30,000 becomes a suspended loss, carried forward until basis is restored
  
  

Shareholder B has enough basis, so they deduct the full $100,000.

Common Reasons S Corporations Generate NOLs

S Corps often create losses during:

• Start-up years
  
  

• Large equipment purchases
  
  

• Real estate depreciation
  
  

• High operating expenses
  
  

• Economic downturns
  
  

• Shifts in business structure or revenue model
  
  

Using these losses strategically can produce significant tax savings.

How to Increase Basis to Use S Corp NOLs

Shareholders may increase basis by:

• Contributing additional capital
  
  

• Making bona fide shareholder loans
  
  

• Leaving earnings in the company
  
  

• Avoiding excess distributions
  
  

This allows the shareholder to unlock previously suspended losses.

Recordkeeping Requirements

Shareholders should track:

• Stock basis
  
  

• Debt basis
  
  

• Suspended losses
  
  

• Distributions
  
  

• Repayments of shareholder loans
  
  

The IRS requires shareholders to maintain accurate basis worksheets (Form 7203).

📞 Contact Z-Tax & Accounting today to get expert help with your S-Corporation estimated tax payments, filings, deductions and compliance throughout the year.