Can I claim a net operating loss from a year I never filed?

Not reliably. The NOL deduction is a computed figure carried from the loss year return onto Schedule 1 of a later Form 1040, and the Internal Revenue Manual at irs.gov/irm/part4/irm_04-011-011 requires records that let an examiner verify the deduction, warning that an examiner may disallow the entire NOL deduction for lack of substantiation. File the loss year and prepare Form 172 for it, even if that year is now too old to produce a refund of its own.

How much taxable income can an NOL carryforward offset?

For losses arising in tax years beginning after 2017 and carried to years beginning after 2020, the Instructions for Form 172 at irs.gov/instructions/i172 limit the NOL deduction to 80 percent of taxable income computed without regard to deductions for NOLs, qualified business income or section 250. The remaining 20 percent stays taxable, and any unused NOL carries forward to the next year with no expiry date.

Does a loss on my UK rental property create a US net operating loss?

Rarely on its own. Publication 925 at irs.gov/publications/p925 treats rental activities as passive unless you are a real estate professional, so the loss is deductible against passive income and otherwise carried forward. The 25,000 dollar special allowance for active participation is reduced by 50 percent of modified adjusted gross income above 100,000 dollars, which phases it out for most UK-based professionals. Suspended losses are released on a fully taxable disposition of your entire interest.

If HMRC has already given me relief for a trading loss, is the US loss used up?

No. UK loss relief and US NOL rules are entirely separate systems. HMRC helpsheet HS227 at gov.uk/government/publications/losses-hs227-self-assessment-helpsheet allows a trading loss to be carried forward against the same trade, set against general income, or relieved under the early years and terminal loss rules, subject to a cap of the higher of 50,000 pounds and 25 percent of adjusted total income. None of that touches the US computation on Form 172, which stands or falls on its own.

Is the AMT net operating loss different from the regular one?

Yes, and it must be tracked separately. The Instructions for Form 6251 at irs.gov/instructions/i6251 set out the alternative tax net operating loss deduction at line 2f, computed using AMT income and deductions with the section 172(d) modifications applied for AMT purposes, and generally limited to 90 percent of alternative minimum taxable income figured without that deduction. The instructions confirm the AMT treatment does not affect your regular tax NOL.

Does the foreign earned income exclusion affect my ability to use an NOL?

Significantly. Publication 54 at irs.gov/publications/p54 states you cannot deduct or exclude any item, or take a credit for any item, related to amounts excluded as foreign earned income, so expenses allocable to excluded income are disallowed. The exclusion also suppresses the taxable income against which the 80 percent NOL limitation is measured. Revoking the exclusion is not a free move: the Form 2555 instructions bar you from claiming it for the next 5 tax years without IRS approval.

Net Operating Losses on Late-Filed US Returns

When a US person in the UK catches up on missed US tax returns, the year that shows a loss is the one year they are most tempted to leave out of the package, and it is almost always the year that carries the most money. Filing that year is what establishes the net operating loss. The net operating loss is what shelters the profitable year sitting next to it in the same submission. Leave the loss year unfiled and you have not saved a filing fee, you have thrown away the deduction that would have paid for the whole exercise.

A net operating loss, in the plainest terms the IRS uses, is the amount by which your allowable deductions exceed your gross income for the year, recomputed under a set of statutory modifications that strip out items Congress decided should not be allowed to create or deepen a loss. For an individual it is now figured on Form 172. That is a change worth knowing about, because most published guidance still points at Publication 536, and the IRS has confirmed at irs.gov/forms-pubs/publication-536-will-no-longer-be-revised that Publication 536 will no longer be revised after tax year 2023. The live guidance is the Instructions for Form 172 at irs.gov/instructions/i172.

The pattern we see most often in catch-up work is a British-based US citizen who started a consultancy or a small company that lost money in its first two years, or who bought a flat in London that ran at a loss while it was being let out for the first time, and who then had a good year afterwards. Handled as a package, the loss and the profit meet. Handled as isolated returns, they never do.

What is a net operating loss and how is it computed for an individual?

A net operating loss is a trade or business loss, not a bad year. That distinction is the whole of the computation. The Instructions for Form 172 state that individuals, estates and trusts use Form 172 to figure the amount of the NOL that is available for carrying back or forward, and the form works by taking the negative number at the bottom of your return and adding back items that are not business losses.

The main modifications the IRS requires on Form 172 are these:

Nonbusiness deductions are allowed only up to nonbusiness income. Your standard deduction or itemised deductions, IRA contributions and alimony are nonbusiness deductions; dividends, interest and pension benefits are nonbusiness income. A large standard deduction cannot, on its own, manufacture an NOL.
Capital losses in excess of capital gains cannot be deducted in figuring an NOL. Capital losses have their own carryforward mechanism and are kept out of this one.
The NOL deduction itself, meaning an NOL carried in from another year, is excluded. You cannot stack one NOL on top of another to enlarge the second.
The section 199A deduction for qualified business income is not allowed in the NOL computation.
The section 1202 exclusion of gain on the sale or exchange of qualified small business stock is added back.

What survives all of that is the genuine operating loss of a trade or business. In practice, for the cross-border clients we prepare returns for, that means Schedule C consultancy losses, a partnership or LLC share of trading losses, and in some cases rental losses that clear the passive activity gate discussed further down. It does not mean a year in which the market went against your portfolio, and it does not mean a year in which you simply earned less than your deductions.

One structural rule that catches out anyone whose knowledge of NOLs predates 2018: for losses arising in tax years after 2020, the Instructions for Form 172 state that generally you can only carry the NOL to a later year. The general carryback is gone. A narrow exception survives for farming losses, which qualify for a 2-year carryback period, and that is of no help to a London consultant. The corresponding upside is that the carryforward runs indefinitely, so a loss established in a year you are filing five years late does not simply age out.

Why filing the loss year matters when you catch up on missed US tax returns

This is the gap in almost every guide on the subject, so it is worth being blunt about it. A reader assembling missed US tax returns reasons as follows: 2022 had no tax due, so 2022 does not need to be filed, so I will file 2023, 2024 and 2025 and be done. That reasoning quietly discards the deduction.

The NOL deduction is not a fact about your life, it is a number computed on a filed return and carried onto a later one. The Instructions for Form 172 direct that where you carry an NOL forward, you list the NOL deduction as a negative figure on Schedule 1 of Form 1040 for the year to which it is carried. That figure has to come from somewhere, and the somewhere is the loss year computation on Form 172.

The IRS position on substantiation is unusually direct. The Internal Revenue Manual at irs.gov/irm/part4/irm_04-011-011 states that the taxpayer is required to maintain such records as will allow the examiner to verify the accuracy of the deduction, and that copies of tax returns are not proof, nor are accountants workpapers or testimony that is general, vague and unsupported. If the taxpayer declines to produce the records or the records are unavailable, the examiner may disallow the entire NOL deduction for lack of substantiation. A carryforward asserted out of an unfiled year, unsupported by a return and a Form 172 computation, is exactly the kind of claim that manual is written to defeat.

There is a second point in the same manual that cuts in the taxpayer's favour and is almost never mentioned. The Service may redetermine correct taxable income in a closed year in order to ascertain the amount of an NOL, or the amount of an NOL absorbed in that closed year, for the purpose of determining the correct NOL deduction in an open year. The loss year does not have to be an open year for the carryforward to be examined. It follows that the loss year does not have to be an open year for the carryforward to exist either. What it does have to be is filed and supported.

The refund statute is a separate question and it is where the confusion usually starts. IRS Topic no. 153 at irs.gov/taxtopics/tc153 states that you must file your return to claim a refund within 3 years of the return due date. That rule limits your ability to get back withholding or refundable credits for the loss year itself. It does not convert the loss into nothing. The carryforward is claimed on the later year's return, and the later year may be well inside the refund window even when the loss year is not. Filing a loss year that is too old to generate its own refund is still worth doing, because of what it does to the years after it.

How much of a later year's income can an NOL carryforward actually shelter?

Not all of it, and this is the single most commonly misstated number in the field. The Instructions for Form 172 set the limit precisely. Your NOL deduction for tax years beginning after 31 December 2020 cannot exceed the sum of the NOLs carried to the year from tax years beginning before 1 January 2018, plus the lesser of the NOLs carried to the year from tax years beginning after 31 December 2017, or 80 percent of the excess, if any, of taxable income computed without regard to deductions for NOLs, for qualified business income, or under section 250, over the NOLs carried to the year from tax years beginning before 1 January 2018.

Translated into the situation of an ordinary catch-up filer, whose losses will all have arisen after 2017: an NOL carryforward can wipe out at most 80 percent of the receiving year's taxable income measured before the NOL, the qualified business income deduction and any section 250 deduction. Twenty percent of that measure remains exposed. Any unused NOL rolls on to the following year, indefinitely.

The practical consequence for a Streamlined package is that a single large loss year rarely eliminates the tax on the strongest year in the set. It reduces it, and pushes the remainder into the year after, which may sit outside the three years being filed. That is not a defect. It is a reason to compute the carryforward properly on the loss year return so that the residue is documented and available for the next return you file on time.

A worked illustration: three catch-up years with a loss in the middle

Treat every figure here as illustrative only. Assume a US citizen resident in London who has not filed since leaving the US, and who is now assembling a Streamlined Foreign Offshore submission covering three years. Year one shows a small profit. Year two, the year she left employment and set up a consultancy, shows a Schedule C loss of 90,000 dollars after the Form 172 modifications, with no other business income. Year three, the year the consultancy took off, shows taxable income before any NOL, qualified business income deduction or section 250 deduction of 100,000 dollars.

Applying the limitation, the NOL deduction in year three is capped at 80 percent of 100,000 dollars, or 80,000 dollars. Taxable income in year three falls to 20,000 dollars rather than to nil, and 10,000 dollars of the original loss remains and carries forward into year four. If year two is left unfiled, the entire 90,000 dollars simply does not exist, and year three is taxed on the full 100,000 dollars. The cost of skipping the loss year is not the preparation fee for that year, it is the US tax on 80,000 dollars of income, plus the loss of the 10,000 dollar residue that would otherwise have followed her into the next return.

Two refinements that this illustration deliberately leaves out, and which you should never leave out of a real file, are the foreign tax credit position in each year and the alternative minimum tax computation, both of which are dealt with next. Where a UK tax charge is already covering the year three liability, the value of the NOL changes character entirely, and in some fact patterns the loss is worth more held back against a future year with genuinely unsheltered US tax.

How does the foreign earned income exclusion interact with a net operating loss?

Badly, and this is where a lot of value leaks out of otherwise competent catch-up filings. The foreign earned income exclusion under section 911 removes foreign earned income from gross income. The Instructions for Form 2555 at irs.gov/instructions/i2555 state that for 2025 the maximum exclusion amount is 130,000 dollars, and Publication 54 at irs.gov/publications/p54 is explicit that you cannot deduct or exclude any item, or take a credit for any item, that is related to amounts you exclude as foreign earned income or foreign housing amounts.

Three consequences follow for a loss year and for the years around it.

A self-employed person cannot exclude the earnings of a trade under Form 2555 and then deduct the expenses of that same trade in full. The Form 2555 instructions require the deductions allocable to the excluded income to be identified and disallowed, which means an exclusion election can shrink or eliminate the loss you were relying on.
In the receiving year, the exclusion suppresses the taxable income against which the NOL would be measured. The 80 percent limitation is computed on taxable income, so a year in which the exclusion has already removed most of the income offers very little for the NOL to work against.
Revoking the exclusion to preserve the value of a loss is a decision with a long tail. The Form 2555 instructions state that once revoked you cannot claim the exclusion for your next 5 tax years without the approval of the IRS. This is not a switch to flip inside a catch-up package without modelling the five years that follow.

In the returns we prepare, the sequencing question is usually whether a client with a UK salary and a loss-making side business is better served by the exclusion or by the foreign tax credit across the whole set of years being filed. For a higher earner in the UK, where UK tax rates on employment income generally exceed the effective US rate, the credit route frequently preserves the loss and the exclusion route frequently wastes it.

What happens to the foreign tax credit in a loss year?

A loss year is usually a year with little or no US tax, and a foreign tax credit reduces US tax rather than generating a refund. Foreign taxes paid in a year with no liability are not lost immediately: Publication 514 at irs.gov/publications/p514 confirms that unused foreign taxes can be carried back one year and forward ten years. Note the asymmetry with the NOL rules. The credit still has a one-year carryback and a finite ten-year life, while the NOL has no carryback and an indefinite life.

The second interaction is the one that surprises people. Publication 514 and the Instructions for Form 1116 at irs.gov/instructions/i1116 describe overall foreign loss accounts. Where you have an overall foreign loss, it reduces your foreign source income in later years for credit limitation purposes, and later years carry a recapture of prior-year overall foreign loss accounts. For a US person living in the UK, whose income is overwhelmingly foreign source, a loss year can therefore create a drag on the foreign tax credit limitation in exactly the later years when the NOL is being absorbed. Modelling the NOL without modelling the overall foreign loss account gives a materially wrong answer.

Why is there a second, separate NOL for the alternative minimum tax?

Because the AMT is a parallel system with its own income measure, it also has its own loss. The Instructions for Form 6251 at irs.gov/instructions/i6251 set out the alternative tax net operating loss deduction, reported at line 2f of Form 6251. The alternative tax NOL is broadly the excess of the deductions allowed in figuring alternative minimum taxable income, excluding the alternative tax NOL deduction itself, over the income included in AMTI, with the section 172(d) modifications applied separately for AMT purposes.

Two features matter for a catch-up file. First, the general limitation on the alternative tax NOL deduction is 90 percent of alternative minimum taxable income figured without regard to that deduction, which is a different percentage applied to a different base from the regular tax rule. Second, and this is the operational point, the Form 6251 instructions are clear that the AMT treatment does not affect your regular tax NOL, and that alternative tax NOL carryforwards must be tracked separately. Two numbers, two schedules, carried forward in parallel for as long as the losses last.

In practice this is the most frequently dropped item we find when reviewing a catch-up prepared elsewhere. A regular tax NOL is computed and carried, and no alternative tax NOL is computed at all, which quietly overstates AMT exposure in every later year. Where a client also has foreign tax credits, the AMT foreign tax credit runs on AMT amounts too, and the Form 6251 instructions describe a simplified section 904 limitation election that applies the same net foreign source income for AMT as for regular tax.

Does a UK rental loss create a US net operating loss?

Usually not directly, because a gate stands in the way. Publication 925 at irs.gov/publications/p925 treats rental activities as passive even if you materially participate in them, unless you are a real estate professional. Losses from passive activities are deductible only against passive income; the disallowed part is carried forward and allocated among your activities in the following year.

Two releases exist. The first is the special allowance: with active participation, an individual can deduct up to 25,000 dollars of loss from a rental real estate activity against nonpassive income. Publication 925 states that this allowance is reduced by 50 percent of the amount by which modified adjusted gross income exceeds 100,000 dollars, with figures of 12,500 dollars and 50,000 dollars for a married taxpayer filing separately who lived apart from their spouse for the whole year. For most of the London landlords in our client base the allowance is already fully phased out by their employment income, which is precisely why they are surprised the loss does nothing. The second release is disposition: on a fully taxable disposition of your entire interest in the activity, previously disallowed losses become deductible.

Note also that Publication 925 excludes the net operating loss deduction from the category of passive activity deductions. Passive loss carryforwards and NOL carryforwards are two separate stacks with separate rules, and a UK rental loss trapped by the passive rules is not sitting in the NOL stack waiting to be used. It is sitting in its own stack, attached to that property, until the property produces passive income or is sold.

Capital loss carryforwards are a different mechanism entirely

Readers regularly arrive believing that a bad year on a portfolio produces an NOL. It does not. IRS Topic no. 409 at irs.gov/taxtopics/tc409 sets the position: where capital losses exceed capital gains, the amount of the excess loss you can claim to lower your income is the lesser of 3,000 dollars, or 1,500 dollars if married filing separately, and if your net capital loss exceeds that limit you can carry the loss forward to later years. Separately, as noted above, the Form 172 computation removes capital losses in excess of capital gains from the NOL calculation altogether.

For a catch-up filer this creates a second reason to file the loss year. A year in which a UK-held portfolio was sold at a loss, or in which a currency-driven loss arose on a sterling asset measured in dollars, will generate a capital loss carryforward that has to be tracked from a filed return. The same substantiation logic in the Internal Revenue Manual applies: an unfiled year produces no documented carryforward, and the schedules that would have proved it never existed.

Excess business losses: the rule that turns a large loss into a carryforward

There is one more filter above the NOL rules, and it bites on the exact profile this article is about: a business owner with a very large loss in one year. The Instructions for Form 461 at irs.gov/instructions/i461 explain the excess business loss limitation for noncorporate taxpayers. For 2025, the threshold amount is 313,000 dollars, or 626,000 dollars for taxpayers filing a joint return. A disallowed excess business loss is not lost; it is treated as a net operating loss carryover to the following year, and the Form 461 instructions point directly to Form 172 for the carryover mechanics.

The practical effect on a catch-up package is that a single very large loss year cannot be dropped into the immediately preceding or following year in one piece. It is metered out. That is a further argument for filing early loss years rather than starting the catch-up at the first profitable year, because the loss reaches the profitable years only by travelling through the intervening returns.

UK loss relief and US NOL rules are entirely separate systems

This is the point that costs UK-based US persons the most money, and it is almost never stated plainly. A loss relieved in the UK is not thereby used in the US. The two systems share no accounting, no election and no ordering. A trading loss set against your general income on a Self Assessment return still exists, undiminished, for US purposes, provided the US loss year return is filed and the loss survives the Form 172 modifications.

The UK rules themselves are worth stating so the contrast is clear. HMRC helpsheet HS227 at gov.uk/government/publications/losses-hs227-self-assessment-helpsheet sets out the options for a trading loss: carry it forward against future profits of the same trade, set it against general income of the current or previous tax year, claim early trade losses relief in the first four years of a trade with relief carried back against earlier years, or claim terminal loss relief when the trade ceases. There is a cap on income tax reliefs deductible from total income, set at the higher of 50,000 pounds and 25 percent of the adjusted total income of the year.

Set that against the US position and the divergence is total. The UK offers sideways relief against general income; the US, for a loss arising after 2020, generally offers carryforward only. The UK caps relief by reference to a pounds figure and a percentage of total income; the US caps the NOL deduction at 80 percent of taxable income measured before the NOL. The UK allows a carryback in defined circumstances; the US does not, outside the farming exception. Nothing that happens on the SA100 tells you anything about the number that belongs on Schedule 1.

The same separation applies on the property side, with an extra wrinkle. HMRC guidance at gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income states that normally you can only offset a rental loss against profits arising from the same rental business in future years, and that profits and losses from overseas properties must be kept separate from properties in the UK. So a UK-resident US citizen with a London flat and a Florida rental is already running two separate loss pools for HMRC, and a third and fourth set of rules for the IRS through the passive activity system. Four pools, four sets of carryforwards, one client. This is exactly the situation in which unfiled years destroy value silently.

How does this fit into a Streamlined Foreign Offshore submission?

The Streamlined Filing Compliance Procedures for taxpayers residing outside the United States, described at irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states, require delinquent or amended tax returns for each of the most recent 3 years for which the US tax return due date, or properly applied for extended due date, has passed, together with delinquent FBARs for each of the most recent 6 years for which the FBAR due date has passed. Taxpayers who properly comply are not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties or FBAR penalties.

The three-year requirement is a floor, not a ceiling, and that is the design point people miss. If the loss year sits in year four or year five, nothing prevents filing it. It will not be part of the Streamlined package itself, but it establishes the NOL that the Streamlined years then absorb, and it is filed with the same care and the same substantiation. In our experience the decision of where to start the catch-up should be driven by where the losses are, not purely by the minimum the procedure demands.

Record retention deserves a closing word, because the NOL is the one item on a return that can be challenged many years after the year it arose. The Instructions for Form 172 tell you to keep records for any tax year that generates an NOL for 3 years after you have used the carryback or carryforward, or 3 years after the carryforward expires. With an indefinite carryforward, that is an open-ended obligation. Keep the loss year return, the Form 172 computation, the underlying books and the bank records together as a single file, and keep the alternative tax NOL schedule alongside it. The deduction is only worth what you can prove.

If you are working out where to start on missed US tax returns from the UK, the loss years are the first thing to map, not the last. Our US filing work is set out at us-uktax.com/us-tax-services, the UK side at us-uktax.com/uk-tax-services, and the catch-up route itself at us-uktax.com/streamlined-foreign-offshore-procedures and us-uktax.com/irs-streamlined-filing. If you want the position modelled before you commit to a filing order, us-uktax.com/contact is the place to start.