Carrying losses forward: the 80% cap, the first three years and unincorporated businesses

Chiara owns an Italian furniture SRL that closed 2025 with a tax loss of €100,000. In 2026 business picks up and taxable income returns to 60,000 euros. Since the loss is bigger than the profit, Chiara expects to pay no IRES for the year. She is about to learn that the tax code lets her offset only part of her income, and that some tax is still due.

What a tax loss is

A tax loss is not the same as the loss shown in the accounts. It arises when, after every adjustment in the return, the negative items tax law accepts outweigh the positive ones. A company can report an accounting loss and still have taxable income, or the reverse, depending on add-backs and off-book deductions.

Article 84 of the TUIR, the Italian consolidated income tax act, says so in terms: the loss for a tax period is measured under the same rules that apply to income. Anything the act refuses as a cost, such as expenses unrelated to the business or amounts above statutory limits, also shrinks the loss available to carry forward.

For a struggling business, carry-forward has real value: every euro of loss used cuts IRES by 24 cents at the standard rate. A 100,000-euro loss is therefore potentially worth 24,000 euros of tax saved in the years when the company is back in profit.

The cap at 80 per cent of income

Paragraph 1 of article 84 lets the loss be set against the income of later periods, but for no more than eighty per cent of each period's taxable income. The remaining twenty per cent of income stays taxable even when the available losses would be large enough to wipe it out.

The provision adds that the loss is used for the whole amount that fits within that cap. Whatever does not fit is not forfeited: it stays available for later years, subject to the same yearly ceiling. The text read sets no maximum number of years for carrying losses forward.

The cap protects the Treasury's cash flow: even a business sitting on large accumulated losses pays some tax in good years. For the business, it means a big loss is recovered slowly, often across several years, and its real value depends on how quickly profits come back.

When drawing up a business plan after a bad year, it is therefore worth estimating not only when profit will return but how large it will be. A heavy loss and modest profits mean a long recovery, with twenty per cent of income taxed along the way in every single year.

Losses from the first three years

Paragraph 2 treats newcomers more generously. Losses made in the first three tax periods from incorporation are set against later income up to the whole of taxable income, not just eighty per cent of it. A start-up that turns profitable can therefore bring its taxable income down to zero.

There is a condition: the losses must relate to a new productive activity. A company set up to carry on an existing business, for example by taking over its going concern with nothing changed, risks being denied the favourable treatment, because the activity is not new even though the company is.

The loss schedule should therefore keep the portion arising in the first three years apart from the portion that arose later. The two follow different caps, and mixing them up leads to using too little of the first or too much of the second, mistakes that only surface in an audit.

Exempt income and profit exemption regimes

The loss is not always the figure a plain calculation gives. Paragraph 1 reduces it by tax-exempt income, other than the income covered by article 87 on shareholdings, to the extent that it exceeds the costs left non-deductible under article 109, paragraph 5. The aim is to stop exempt income from also feeding a loss carried forward.

A similar rule covers businesses under a regime that exempts their profits: the loss may be carried forward only for the amount above the profit that, in earlier years, did not form part of taxable income. A business that enjoyed an exemption cannot then carry forward losses that the exempt profit had already absorbed.

Sole traders and partnerships

For IRPEF, the personal income tax, carry-forward is governed by article 8 of the TUIR. Paragraph 3 provides that losses from running a commercial business, and losses from holding an interest in a general or limited partnership, are set against income of the same kind, not against the taxpayer's total income.

The cap applies here too: in later periods the offset is allowed for no more than 80 per cent of that income, for the whole amount that fits. The paragraph then refers back to article 84, paragraph 2, so losses from the first three periods of a new activity are also used without a percentage cap by a sole trader.

In practice a sole trader cannot use the loss of the business to reduce, say, a salary earned from a job held alongside it. The loss stays inside the business income bucket and waits for the years in which the business earns again.

For general partnerships (SNC) and limited partnerships (SAS), paragraph 2 of article 8 allocates the loss to each partner in the proportion set by article 5, that is according to their share of profits. Each partner then offsets it against their own income of the same kind, subject to the cap in paragraph 3.

Limited partnerships have a special feature: the part of the loss exceeding the partnership capital is allocated to the general partners only. Limited partners, whose liability stops at the capital they contributed, receive no loss beyond that threshold.

Paragraph 1 of article 8 deals with professionals separately: losses from practising arts and professions are subtracted when total income is computed. The text read does not give these losses a carry-forward to later years built like the one in paragraph 3 for businesses.

The schedule of available losses

Anyone with losses to carry forward should keep a schedule with one line per year of origin: original amount, reductions for exempt income, nature of the loss, amount used in each later year and remaining balance. The income tax return reports prior-year losses every year, and the schedule is how they are rebuilt.

• Year of origin and amount of the loss declared
• Whether the loss belongs to the first three periods of a new activity
• Reductions for exempt income and the workings behind them
• Year-by-year use, with the income of reference and the cap applied
• Balance available at the start of each year

The position in 2026

Articles 8 and 84 are read in the version that governs the 2026 tax year. The new consolidated act introduced by legislative decree no. 117 of 19 June 2026 replaces them from 2027: anyone carrying losses over several years will need to check how that act treats balances still open at the end of 2026.