NOLs

Net operating losses (NOLs) are tax attributes that occur when a company’s deductible expenses exceed its taxable income in a given year, resulting in negative taxable income. NOLs allow a business to offset profits in other years, reducing overall tax liability. The mechanisms for using NOLs—carrying the loss forward to offset future taxable income or carrying it backward to claim a refund for past taxes—vary by country and over time. Some jurisdictions permit only forward carryforwards, others allow limited backward carrybacks, and many impose annual offset or duration limits on the amount of income that can be offset.

Accounting and planning implications often accompany NOLs. In financial reporting, NOLs can give rise to a deferred tax asset if it is more likely than not that future profits will be available to absorb them. In tax planning, NOLs affect timing of profits, financing decisions, and potential changes in ownership that can limit the use of losses under specific rules in some jurisdictions.

In the United States, changes enacted by the Tax Cuts and Jobs Act of 2017 substantially altered NOL treatment for years after 2017: generally no carryback, indefinite carryforward, and a limit on the deduction to a portion of current-year taxable income (commonly described as an 80% cap). The CARES Act temporarily provided carrybacks and suspended the cap for 2018–2020; rules for subsequent years vary and may differ by state.

Because NOL rules differ widely and can change, businesses rely on current jurisdictional guidance to determine eligibility, timing, and the amount that can be offset.