A net operating loss refers to a tax year in which a business’s allowable tax deductions exceed its taxable income. In simpler terms, you had more expenses than you actually had revenue. However, there is a loophole: U.S. Code IRC § 172 allows businesses to use that loss as a carryover toward future tax years or as a carryback to recoup money from previous tax years. Calculating and taking advantage of an NOL can be hugely beneficial to your business if you need money fast. An NOL can offer you a quick tax refund, but you must be up to date on the rules and regulations of this tax relief.
Why does the NOL exist?
Given that businesses are taxed on the money they earn, the federal government determined that they deserve tax relief if they lose money. Now businesses can file that loss as an NOL and reap the benefits of a carryback or carryover.
If a business experiences a loss in a certain tax year, that loss may qualify as an NOL, and the company can apply that loss to previous tax years, going back more than five years. However, starting with the fifth year going back, you are able to receive only 50 percent of the taxable income for that carryback year. Businesses also have the option of carrying forward their NOL as much as 20 years into the future.
How to calculate an NOL
I’m not going to beat around the bush here — calculating your NOL is time-consuming and sometimes confusing. The rules for computing your NOL differ from the regular tax computation rules. For example, there are many deductions that you can take on a regular tax return that can’t be taken when calculating your NOL.
If you decide to carry back an NOL, you are required to recalculate your adjusted gross income and any items such as IRA deductions or taxable Social Security benefits that were impacted by your original AGI. Furthermore, you’ll be required to recalculate your taxable income and your AMT, if applicable.
For more information on computing NOL and receiving a quick tax refund, give us a call so we can help you work through the details.