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. 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. Consequently, in some situations, Congress allows taxpayers to use the losses in one year to offset the profits of other years.
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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:
In addition, the NOL amount excludes other adjustments such as:
Corporations
For corporations, an NOL is the excess of the deductions allowed over gross income with the following adjustments.
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.
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.
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.