Net operating loss

Under U.S. Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year.[1] If a taxpayer is taxed during profitable periods without receiving any tax relief (e.g. a refund) during periods of NOLs, an unbalanced tax burden results.[2] Consequently, in some situations, Congress allows taxpayers to use the losses in one year to offset the profits of other years.

Calculating the NOL amount

The NOL amount is the amount of the loss from the current year that can be carried back to prior tax years or carried forward to future years.

Individuals

The NOL amount is the business loss incurred by a taxpayer. The following items are excluded when calculating the NOL amount:

  • any deduction for personal exemptions
  • net capital loss (capital losses in excess of capital gains); net capital gains are included
  • nonbusiness deductions in excess of nonbusiness income; net nonbusiness income is included

In addition, the NOL amount excludes other adjustments such as:

  • section 1202 exclusion of the gain from the sale or exchange of qualified small business stock
  • net operating loss deduction from other tax years
  • domestic production activities deduction [3]

Corporations

For corporations, an NOL is the excess of the deductions allowed over gross income with the following adjustments.

  • no NOL deduction
  • no section 199 domestic production activities deduction
  • the dividends-received deductions for dividends received are computed without regard to section 246(b) limit
  • the dividends-paid deduction is computed without regard to the limitation under section 247(a)(1)(B). [4]

Loss carry back and carry forward mechanisms

Generally the NOL must be carried back to the two tax years before the NOL year. For example, the tax loss from 2015 must be carried back to 2013 or 2014. Any remaining amount can be carried forward for up to 20 years. The taxpayer can elect to waive the carry back and therefore carry all of the loss to future years. Once the 20-year carry forward period expires, the taxpayer cannot deduct any part of the remaining NOL.

For tax years prior to 2018, the carry back period for certain NOLs is greater than 2 years:

3 year carry back period
  • losses from casualty or theft
  • farm or small business losses related to a federally declared disaster
  • qualified small business losses
5 year carry back period
  • farm losses
  • qualifying disaster losses (corporations only)
10 year carry back period
  • losses related to product liability claims
  • decommissioning of a nuclear power plant - (corporations only)
  • losses related to reclamation of land and dismantling of drilling platforms
  • losses related to environmental contamination and workers compensation act payments [5]
  • Qualified Gulf Opportunity Zone (GO Zone) losses - (corporations only)

If the corporation has a corporate equity reduction transaction, a different carry forward period may apply.

Section 1211 of the American Recovery and Reinvestment Act of 2009 increased the carry back period for small businesses. For net operating losses incurred in 2008, the carry back period was increased to 5 years. [6] [7]

The Tax Cuts and Jobs Act of 2017 eliminated the net operating loss carryback, and restricted carryforwards. The provision was cut in order to finance the tax cuts in the act, and was one of the largest offsets in the law.[8]

Financial statement reporting

Under US GAAP, the amount of net operating losses available for future years is reported in the notes to the financial statements. For example, Kinross Gold reported $US 893 million of NOL carry forwards were available as at December 31, 2014 related to its subsidiaries in Barbados.[9]

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See also
See also: Internal Revenue Code § List of commonly referenced sections

Notes
  1. Kieso, Weygandt J. and Terry D. Warfield. Fundamentals of Intermediate Accounting, John Wiley & Sons, 2006. p.699 ISBN 0-471-75272-X
  2. Donaldson, Samual A. Federal Income Taxation of Individuals: Cases, Problems and Materials, ThomsonWest, 2 ed. 2007. p.301 ISBN 978-0-314-17597-7
  3. "Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts". IRS.gov. Internal Revenue Service. Retrieved 13 October 2016.
  4. "Instructions for Form 1139" (PDF). www.irs.gov. Internal Revenue Service. p. 2. Retrieved 13 October 2016.
  5. "Publication 536". IRS.gov. Internal Revenue Service. Retrieved 13 October 2016.
  6. See generally 26 U.S.C. § 172.
  7. "Business Provisions of the American Recovery and Reinvestment Act of 2009 (ARRA)". www.IRS.gov. Internal Revenue Service. May 2009. Retrieved 13 October 2016.
  8. Faler, Brian (2020-03-16). "How Republicans' tax overhaul could make a recession worse". Politico. Retrieved 2020-03-16.
  9. "2014 Kinross Gold Annual Report" (PDF). Kinross Gold. pp. FS 52. Retrieved 13 October 2016.
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