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Experiencing a net operating loss?

Experiencing a net operating loss?

Experiencing a net operating loss is a bad place to be in for you as a business owner, seeing that the main purpose of setting up a business is to make a profit. However, situations may arise to defeat this purpose despite the efforts of you and your team and lead to a net operating loss rather than profit at the end of the fiscal year.

A net operating loss is not such a foreign term, in fact, most business owners have experienced it especially during the early years of their company’s establishment. At the initial stage of most business operations, a lot of companies do not generate profits but experience losses. Therefore, a company experiencing a net income loss can report it and can use it to their advantage and benefit. Reporting the net income loss in your business can allow for certain advantages like a reduction in the previous and future taxable income of the company, getting no tax payment request for the period of time until the loss is fully recovered,  and sometimes a refund of previously paid taxes.


What is a Net operating loss?

A net operating loss (NOL) in relation to income tax refers to a situation where a company’s allowable deductions exceed its taxable income within a tax period.

A business owner, therefore, experiencing a Net operating loss can make use of the provisions made available by the IRS which helps the business owner reduce the company’s tax liability and offset the company’s tax payments in other tax periods. These provisions made available by the IRS for businesses experiencing a net operating loss are called Net Operating Loss carryforwards and Net Operating Loss carrybacks.

The net operating loss carryforward is an IRS tax relief provision for businesses that have made a loss in the tax year, which helps to offset the company’s taxable income in later years. On the other hand, the net operating loss carryback which is also a tax relief provision helps to reduce the company’s taxable income for previous years, thereby leading to a possible tax refund.


Net Operating Loss Carryforward

The net operating loss carryforward for businesses that have made a loss in the tax year helps to offset the company’s taxable income in later years which eventually leads to a reduction in the company’s tax liability in subsequent years. A business owner experiencing a net operating loss can decide to carry the NOL forward to any future year within an indefinite carryforward period. This can therefore serve as an asset for the company due to its ability to reduce the company’s future taxable income.

When this decision for a carry forward is made, the business owner will need to create a workable schedule for the net operating losses made, which helps to reduce future years’ profits until the NOL carryforward is reduced to Zero balance. But it should be noted that the carry forward will be limited to and must not exceed 80% of the net income in any of the subsequent years until the balance is reduced to Zero.


Net Operating Loss Carryback

A net operating loss carryback is an IRS tax relief provision that helps a company that has deductions above their taxable income to recover from the loss made in the tax period by reducing the company’s tax liabilities.

This is done by carrying back the amount of losses to up to two years prior to the year when the NOL was recorded. Sometimes, however, due to peculiar circumstances of some losses, the amount of loss can be carried back to three years prior to the year the NOL was recorded. One unique circumstance that can allow filing an amended return which leads to a carryback three years prior to the year of NOL is a loss experienced by the company due to theft.

In previous years, the ability to carry back NOL was favorable to business owners as a tax relief provision for their losses. However, nowadays, business owners experiencing a net operating loss would have to choose the NOL carryforward provision to bounce from their business net loss rather than the NOL carryback. This is because the new tax bill approved in 2017 has, unfortunately, eliminated the ability of taxpayers to carry back their NOL but also, fortunately, has extended the period for carrying forward also to an indefinite length of time rather than the previously approved limited period of twenty years.

Luckily, business owners experiencing Net operating loss during this Coronavirus pandemic period have been granted the privilege to carry back up to 100% of their NOL to five years prior to the year of the NOL which can guarantee a tax refund where possible based on the old higher tax rates of previous years. This was proposed to serve as needed tax relief for business owners in response to the trying economic season the coronavirus pandemic has caused which will basically lead to a net operating loss for many businesses.

Are you experiencing a Net Operating Loss? Need help carrying back or carrying forward your business losses? We can help!

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.