Net Operating Loss
The financial accounting term net operating loss refers to accounting periods or tax years in which the tax-deductible expenses of a company are in excess of their taxable revenues. When a net operating loss occurs, the tax law contains an income averaging provision that allows a company to carry the amount back to the preceding two years, or carry it forward for up to 20 years.
Also known as a NOL, a net operating loss occurs when a company’s taxable expenses are in excess of its taxable revenue. Since companies are required to pay income taxes when profitable, the tax law provides some relief when operating at a loss. Specifically, the law allows businesses to choose one of the following income-averaging approaches:
- Loss Carryback: the business can apply the net operating loss to the preceding two years and receive an immediate tax rebate.
- Loss Carryforward: the business can apply the net operating loss to taxable income for up to 20 years in the future; thereby lowering the amount of taxes due in the years to come.
If a company chooses to carry the loss forward, all of the original NOL must be used to offset taxable income over the next 20 years or this benefit is lost.