Loading the player...

What is a 'Net Operating Loss - NOL'

A net operating loss (NOL) is a loss taken in a period where a company's allowable tax deductions are greater than its taxable income. When more expenses than revenues are incurred during the period, the net operating loss for the company can generally be used to recover past tax payments. The reasoning behind this is that corporations deserve some form of tax relief when they lose money, so they may apply the net operating loss to future income tax payments, reducing the need to make payments in future periods.

BREAKING DOWN 'Net Operating Loss - NOL'

An NOL makes a company unprofitable for tax purposes. For example, Company A has taxable income of $500,000, tax deductions of $700,000 and a corporate tax rate of 30%. Its NOL is $500,000 - $700,000 = -$200,000. Because Company A does not have taxable income, it does not pay taxes that year. Otherwise it would have paid $250,000 x 30% = $75,000 in taxes. Because the company had an NOL the previous year, it may put the NOL toward the current year’s tax bill or apply it against taxable income in previous years.

Rules for Applying an NOL

A business may carry the taxable amount back to the two previous years and apply it against taxable income for a refund. For example, an NOL occurring in 2015 may be used for lowering tax payments in 2013 or 2014. Because the time value of money shows that tax savings at that time is more valuable than in the future, this is the more beneficial choice. However, if the business did not pay taxes in prior years, or the owner’s income is expected to substantially increase in the future and raise the company’s tax rate, the business may also carryforward the amount over the next 20 years, reducing the amount of taxable income during that time.

If a business creates NOLs in more than one year, they are to be drawn down completely in the order they are created before drawing down another NOL. Because any remaining NOL is canceled after 20 years, this reduces the risk of the NOL not being used.

Section 382 Limitation

An NOL may be considered a valuable asset because it can lower a company’s amount of taxable income. For this reason, the Internal Revenue Service (IRS) has a restriction on using an acquired company simply for its NOL’s tax benefits. Section 382 of the Internal Revenue Code states that if a company with a NOL has at least a 50% ownership change, the acquiring company may use only that part of the NOL in each concurrent year that is based on the long-term tax-exempt bond rate multiplied by the stock of the acquired company. However, purchasing a business with a substantial NOL may mean an increased amount of money going to the acquired company’s shareholders than if the business possessed a smaller NOL.

RELATED TERMS
  1. Bad Debt Recovery

    A debt from a loan, credit line or accounts receivable that is ...
  2. Taxable Income

    Taxable income is the amount of income used to calculate how ...
  3. Alternative Tax Net Operating Loss ...

    The excess of deductions allowed over the income recognized for ...
  4. Assessable Profit

    Taxable income payable after accounting for allowable deductions. ...
  5. Net Loss

    The result that occurs when expenses exceed the income or total ...
  6. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
Related Articles
  1. Insights

    Art of the 'Steal': How Trump Lost $916M and Avoided Tax

    This is how Donald Trump’s accountants most likely used the tax code to avoid paying income tax for almost two decades.
  2. Taxes

    How to Make the Most of Your Tax Planning Team

    When financial advisors collaborate with tax advisors, the end result is efficient tax mitigation.
  3. Managing Wealth

    It's Not Just Trump: Meet the HINTs (High Income, No Taxes)

    Donald Trump may be the most flamboyant example, but so many affluent Americans don't pay taxes that the IRS even has a nickname for them.
  4. Taxes

    Tax Day 2018: Start Planning Now

    Use these tips to set yourself up for a successful tax day in 2018.
  5. Taxes

    Minimizing the Amount of Income Tax You Owe

    The amount of income you receive and tax deductions and credits you take impact how much you'll owe.
  6. Taxes

    10 Sources of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  7. Taxes

    5 Tax-Efficient Portfolio Tips for High Income Earners

    High income earners can use these tips to make their portfolio more tax-efficient.
  8. Taxes

    Misconceptions About Income and Taxes in Retirement

    When it comes to taxes and retirement, misunderstandings are common. Here are three.
  9. Retirement

    6 Ways to Reduce Taxes in Retirement

    Use these 6 tips before and after you retire to reduce taxes for yourself and your loved ones.
  10. Investing

    3 Tax-Reduction Strategies for High-Net-Worth Investors

    Learn about three tax strategies that reduce taxable income and minimize the share of taxes paid on employer-sponsored and individual investment accounts.
RELATED FAQS
  1. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center