NOL Loss Carryforward
Net Operating Loss (NOL) Carryforward is a provision that allows businesses to use a net operating loss in one year to offset taxable income in future years. This is particularly beneficial for businesses that have a bad year and incur significant losses. By carrying the loss forward, they can reduce their tax liability in future years when they are profitable again.
The rules regarding how far into the future the NOL can be carried forward can vary depending on the specific tax law of the country or state. In the United States, the Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules for NOL carryforwards. For losses arising in tax years ending after December 31, 2017, the TCJA allows these losses to be carried forward indefinitely, but it limits the use of these losses to 80% of taxable income in any given future year.
As always, businesses should consult with a tax professional for advice tailored to their specific situation as tax laws can be complex, vary by jurisdiction, and can change over time.
Example of NOL Loss Carryforward
Suppose ABC Company, a U.S. corporation, reported a net operating loss of $1,000,000 in the year 2022 due to a large investment in infrastructure that resulted in significant expenses. However, ABC Company expects to be profitable in the upcoming years.
ABC Company can carry forward this loss indefinitely to offset taxable income in future years. This could be beneficial if ABC Company becomes profitable again, as expected.
Now, let’s say in the year 2023, ABC Company has a profitable year and reports taxable income of $800,000. However, due to the NOL carryforward from 2022, ABC Company can offset this taxable income with the previous year’s loss. One important thing to remember is the limitation imposed by the Tax Cuts and Jobs Act of 2017: the company can only offset up to 80% of the taxable income in a given year with the NOL carryforward.
So, ABC Company can use the 2022 NOL to offset $640,000 of the 2023 taxable income (80% of $800,000). This would reduce the company’s taxable income for 2023 to $160,000 ($800,000 – $640,000).
After this, ABC Company would still have $360,000 of the NOL left to carry forward to 2024 and subsequent years ($1,000,000 original NOL – $640,000 used in 2023), until it’s fully used up.
This is a simplified example, and the actual process involves specific rules and regulations. Also, remember that tax laws can vary by jurisdiction and can change over time, so businesses should consult with a tax professional for advice tailored to their specific situation.
