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Simple English definitions for legal terms
net operating loss (NOL)
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A quick definition of net operating loss (NOL):
Net operating loss (NOL): When a company spends more money than it makes in a year, it's called a net operating loss. This means the company can deduct that loss from its taxes in future years to help reduce its tax bill. However, there are limits to how much can be deducted.
A more thorough explanation:
A net operating loss (NOL) occurs when a company's expenses are greater than its income for a given year. This means that the company has a negative taxable income. The Internal Revenue Code defines NOL as "the excess of the deductions allowed by this chapter over the gross income."
For example, if a company has $100,000 in expenses and only $80,000 in revenue, it would have a net operating loss of $20,000.
When a company has an NOL, it can use it to offset its taxable income in other years. This is called a carryback or carryover. For instance, if a company has an NOL of $20,000 in year one and a taxable income of $50,000 in year two, it can use the NOL to reduce its taxable income to $30,000.
However, there are limits to how much of the NOL can be used in a given year. The deduction is limited to 80% of taxable income.
Overall, an NOL can be a helpful tool for companies that experience a loss in a given year. It allows them to reduce their tax liability in future years and potentially improve their financial situation.