NOL Carryforward and the TCJA 80% Limit for Canadian LLC Owners

If you are a Canadian who owns a US LLC and your business posted a loss this year, the path to actually using that loss on a future US return is longer than most articles describe. AI Overview tells you "post-2017 NOLs carry forward indefinitely but are capped at 80% of taxable income." That sentence is technically correct and operationally incomplete. Before §172 even applies, four other limitation provisions must clear in sequence. The phantom "90% non-resident rule" that shows up in PAA boxes does not exist. And on Form 1040-NR, your NOL can only offset future effectively connected income, not your worldwide income. This post walks the full cascade.

30-second answer

A net operating loss generated by a Canadian-owned US LLC must pass through four prior loss-limitation layers before §172 carryforward kicks in. The §704(d) basis limit, the §465 at-risk rules, the §469 passive activity rules, and the §461(l) excess business loss cap each clip the deductible loss in order. Whatever survives becomes the NOL. Post-2017 NOLs carry forward indefinitely on Form 1040-NR but cannot offset more than 80% of taxable income in any future year, and a non-resident owner can only apply that NOL against future US-source effectively connected income reported on Schedule NEC. The "90% non-resident NOL rule" that appears in PAA boxes is a phantom, often confused with the AMT 90% limit or the §163(j) interest expense floor.

The four-layer cascade before §172 applies

A common Canadian-owner question: "I lost $80,000 in my LLC this year. Do I get an $80,000 NOL?" Probably not. Four provisions sit upstream of §172 and each one can shrink the number.

The layers run top-down. If §704(d) reduces your $80K loss to $50K because your outside basis is only $50K, the $30K excess is suspended at the partnership level and never reaches §465, §469, §461(l), or §172. The remaining $50K then runs through §465, and so on.

For Canadian non-residents, layers 1 through 4 work the same as for US persons. Layer 5 has a Form 1040-NR twist: the NOL can only offset future effectively connected income, not your worldwide income reported elsewhere.

Step 1: §704(d) outside basis (MMLLC partners only)

If your US LLC is a multi-member partnership for US tax purposes, your allocable share of losses is deductible only up to your outside basis in the partnership interest. Outside basis is roughly:

• Initial capital contributed
• Plus your share of partnership debt you are personally liable for
• Plus your share of prior partnership income previously taxed to you
• Minus your share of distributions
• Minus your share of prior partnership losses already deducted

If your outside basis is $20K and your allocable loss is $50K, only $20K passes through to your return this year. The remaining $30K is suspended at the partnership level and waits until you have basis again, either through new contributions or future allocated income.

This layer does not apply to single-member LLCs that are disregarded entities. SMLLC owners skip directly to §465.

Step 2: §465 at-risk rules

The at-risk rules limit your deductible loss to amounts you are personally at risk of losing. For most Canadian LLC owners with no recourse debt, the at-risk amount equals your cash contribution plus retained earnings, similar to outside basis.

The trap: if your LLC borrowed money on a non-recourse basis, the borrowed amount may not count toward your at-risk number. A common scenario for Canadian-owned US LLCs is real estate financing where the lender has no personal recourse against you. The loan funds an asset, but the principal is not at-risk for §465 purposes. The carve-out for qualified non-recourse financing in real estate is the exception.

Suspended at-risk losses carry forward indefinitely and unlock when your at-risk amount increases, typically through additional contributions or guarantees.

Step 3: §469 passive activity rules

If you do not materially participate in the LLC, your loss is treated as passive and can only offset passive income from other sources. For Canadian non-residents, this layer often bites SaaS founders who outsource operations and visit the US only quarterly, and real estate LLC owners who do not qualify as real estate professionals.

Material participation requires meeting one of seven tests under Treas. Reg. §1.469-5T. The most commonly used tests:

• 500 hours of participation in the activity during the year
• All of the activity is performed by you (no employees, no contractors performing substantive work)
• More than 100 hours and more than any other individual
• Significant participation activity exceeding 500 hours in aggregate across multiple activities

Suspended passive losses carry forward indefinitely. They release when you generate passive income from any source or when you dispose of your entire interest in the passive activity in a taxable transaction.

Step 4: §461(l) excess business loss

For tax year 2024, the excess business loss limit is $305,000 for single filers and $610,000 for joint filers. Any business loss above that threshold cannot offset non-business income in the current year. The excess gets converted into a §172 NOL and carries forward.

This layer rarely affects solo Canadian LLC owners with modest losses, but it matters for larger trading or real estate operations. The threshold indexes annually for inflation. §461(l) was scheduled to sunset under TCJA but has been extended multiple times. As of 2026, it remains in effect through 2028 under the Inflation Reduction Act extension.

Step 5: §172 NOL with the 80% cap

What survives layers 1 through 4 becomes the NOL. For post-2017 NOLs:

• Carryforward: Indefinite
• Carryback: Generally not allowed, except for farming and certain insurance NOLs
• Annual use limit: 80% of pre-NOL taxable income

The 80% limit is the operational kicker. If you have $100K of taxable income in a future year and a $200K NOL carryforward, you can only deduct $80K of NOL that year, leaving $20K of taxable income to be taxed. The remaining $120K NOL carries to the following year.

Pre-2018 NOLs (generated in tax years before 2018) operate under the old rules: 2-year carryback, 20-year carryforward, no 80% cap. If you have both old and new NOLs, you must apply them in the order generated, and pre-2018 NOLs apply without the 80% restriction.

Two-tier worked example: pre-2018 + post-2017 NOLs

A Canadian-owned US LLC with NOLs from multiple years illustrates the ordering rule.

Assumptions:

• 2017 NOL: $40,000 (pre-TCJA, 20-year clock, no 80% cap)
• 2020 NOL: $60,000 (post-TCJA, indefinite, 80% cap)
• 2026 taxable income (US-source ECI on Form 1040-NR before any NOL): $80,000

Step A: Apply 2017 NOL first (oldest)

The 2017 NOL has no 80% cap. Apply up to the full $40,000.

Step B: Apply 2020 NOL to remaining $40K

The 2020 NOL is post-TCJA and capped at 80% of taxable income at the point of application. Some practitioners compute the 80% against the original taxable income, others against the remaining income after older NOLs. The IRS position in Pub. 536 and Form 1045 instructions applies the 80% to the original year's taxable income.

The 2017 NOL fully consumed itself. The 2020 NOL applied $24,000, leaving $36,000 to carry to 2027. The final taxable income of $16,000 is taxed normally.

If the 2017 NOL did not exist, the 2020 NOL would have applied up to $64,000 (80% of $80,000), leaving $16,000 of taxable income and a $0 carryforward. The two-tier structure changed the answer.

The phantom 90% non-resident rule

PAA frequently shows a question like "Is there a 90% NOL limit for non-residents?" This rule does not exist. The confusion comes from three real provisions that each use a 90% figure but apply to different things.

None of these is a non-resident-specific rule. A Canadian non-resident LLC owner faces the same §172 80% cap as a US person. The 90% number people remember is the AMT NOL, not a regular NOL.

The AMT NOL operates in parallel with regular NOL. When you compute AMT, you cannot use the regular NOL deduction directly. You compute an Alternative Minimum Tax NOL, which is the regular NOL adjusted for AMT preference items, and that ATNOL is capped at 90% of AMTI under §56(d). For most Canadian non-resident LLC owners with simple structures, AMT does not bite because their income is below the AMT exemption. But the 90% number sticks in PAA results because Google indexed older content from the 2010s that emphasized AMT NOL.

Form 1040-NR mechanics: ECI offset only

A Canadian non-resident files Form 1040-NR and reports US-source income in two categories:

• Effectively connected income (ECI): Net business income on Schedule C or Schedule E, taxed at graduated rates
• Fixed, determinable, annual, or periodical income (FDAP): Withholding-tax income reported on Schedule NEC, taxed at flat 30% or treaty rate

NOL generated from a US LLC offsets only future ECI, not FDAP. If your LLC posts a $50,000 NOL this year and next year you have $40,000 of ECI from the same LLC plus $10,000 of US royalties (FDAP) collected through W-8BEN, the NOL applies against the $40,000 ECI only. The royalty income is still taxed at 30% or treaty rate.

The NOL does not flow back to Canada. CRA computes Canadian losses separately under §111(1)(a) ITA. The two systems run parallel: a US NOL helps your future US 1040-NR, and a Canadian non-capital loss carryforward helps your future T1.

Canada-side mirror: §111(1)(a) ITA

The CRA equivalent of §172 is §111(1)(a) of the Income Tax Act. Canadian non-capital losses carry back 3 years and forward 20 years. There is no 80% cap on Canadian non-capital loss use.

Two separate accounting buckets matter:

The US side and the Canada side compute losses on different facts because:

• CRA treats the US LLC as a foreign corporation. The Canadian member sees LLC losses only if and when distributed (rare for a loss year) or through specific elections.
• IRS treats SMLLC as disregarded. Canadian member sees losses directly on Form 1040-NR Schedule C.

For most Canadian-owned US LLCs, the Canadian non-capital loss carryforward does not increase because of US LLC operations. The two systems are largely independent on the loss side.

Treaty Article VII and §172

The Canada-US Tax Treaty Article VII exempts a Canadian resident's business profits from US tax unless there is a US permanent establishment. Article VII protects profits, but it does not invalidate the US NOL mechanism on losses.

If a Canadian LLC owner has no US PE and would have invoked Article VII against profits, but the LLC posted a loss instead, two paths exist:

1. Do not file 1040-NR for the loss year: No US tax liability, no US NOL generated. The loss is purely a Canadian event under CRA's classification rules, which usually treat it as inside the LLC and not flowed through.

2. File 1040-NR with the loss: Establishes a US NOL carryforward against future ECI. Costs nothing in current US tax. Provides optionality if you later have US-source ECI that does become taxable, such as if your LLC develops a US PE.

Option 2 is the conservative choice. Filing the protective return preserves the NOL. Most cross-border CPAs recommend it when the loss is meaningful and the LLC has any prospect of future US activity.

Form 1045 vs amended 1040-NR

Two procedural paths exist to apply NOLs to prior or current years.

Form 1045 is available only when carryback is allowed. For most post-2017 NOLs, carryback is disallowed except for farming and insurance. Form 1045 is rarely useful for Canadian LLC owners in 2026.

The standard path is to apply NOL on the current year's 1040-NR in the year you want to use it. No prior-year amendment is needed unless you missed claiming the NOL in an earlier year, in which case the amended return must be filed within 3 years of the original due date.

Departure scenario: NOL on LLC dissolution

If you dissolve the US LLC, the NOL stays with you (the owner) for SMLLC disregarded entities or with the entity for partnerships and C-corp elections.

The corp-elected LLC case is the cliff. If you elected C-corporation treatment under Form 8832 and dissolved, the unused NOL evaporates. This is one factor against the corp election for LLCs that may not have long lives.

For SMLLC and MMLLC partnership cases, the NOL survives the LLC dissolution. You continue to claim it on future 1040-NR returns as long as you have future US-source ECI to apply it against. If you exit the US market entirely and never have ECI again, the NOL is effectively useless even though it does not expire.

Frequently asked questions

What is the 80% limitation on NOLs?

For NOLs generated in tax years starting after December 31, 2017, the deduction in any future year is capped at 80% of taxable income before the NOL. The excess carries forward indefinitely. Pre-2018 NOLs are not subject to this cap and carry forward 20 years.

Is there a 90% NOL limit for non-residents?

No. The 90% figure people reference is the AMT NOL limit under §56(d), which applies to all taxpayers in the AMT system, not specifically to non-residents. A Canadian non-resident LLC owner faces the same §172 80% cap as a US person on the regular NOL.

Can a Canadian non-resident use a US NOL against Canadian income?

No. The US NOL applies only against future US-source effectively connected income on Form 1040-NR. Canadian non-capital losses are computed separately under §111(1)(a) ITA and can offset Canadian income up to 20 years forward and 3 years back, but the two systems do not cross.

What if I close my US LLC with an unused NOL?

For an SMLLC disregarded entity or MMLLC partnership, the NOL belongs to the individual owner and survives the LLC's dissolution. You can claim it on future 1040-NR returns as long as you generate future US-source ECI. For an LLC that elected C-corp treatment via Form 8832, the NOL dies with the corporation.

How does Treaty Article VII interact with NOLs?

Article VII protects Canadian-resident business profits from US tax, but it does not block the US NOL mechanism for losses. Filing a protective 1040-NR for a loss year establishes the NOL carryforward even when no US tax is owed.

Related reading

• Foreign tax credit and trapped FTC for Canadian US LLC owners
• Section 199A QBI for Canadian non-resident LLCs
• Form 1040-NR for Canadian LLC owners
• Form 8832 corp election for Canadian LLC owners
• ECI vs FDAP for Canadian LLC members