Under U.S. Federal income tax law, a net operating loss occurs when certain tax-deductibleexpenses exceed taxable revenues for a taxable year. If a taxpayer is taxed during profitable periods without receiving any tax relief during periods of NOLs, an unbalanced tax burden results. 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:
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 limit
the dividends-paid deduction is computed without regard to the limitation under section 247.
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:
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. 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.
