Definition
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.
Explanation
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.
Related Terms
deferred income taxes, loss carryback, loss carryforward
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