Net Operating Losses (NOLs) are a tax deduction that allows businesses to offset income with losses incurred while in the course of their activities. The purpose of NOLs is to help shield businesses from larger tax bills due to deductions or losses that are greater than their reported income. They are particularly beneficial for businesses that are growing rapidly or in a down economy, since they allow those companies to reduce their taxes by transferring part of their losses to previous years.

NOLs are typically calculated as the excess of deductions over taxable income. This means that if a company’s deductions exceed their taxable income, they have a net operating loss. These losses can be carried forward to future tax years as an offset against taxable income.

The Tax Cuts and Jobs Act (TCJA) of 2017 made major changes to the rules governing NOLs effective January 1, 2018. One of the most significant changes was that NOLs can now be carried forward indefinitely, subject to an 80% taxable income limitation. This means that the NOL deduction in any taxable year cannot exceed 80% of the taxable income for that year.

In March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waived the restriction on NOL carryback for the tax years 2018, 2019, and 2020. This means that businesses are now able to carryback and apply these losses to reduce taxable income in those years. However, NOLs from 2021 or later may not be carried back and must be carried forward indefinitely.

The rules surrounding NOLs can be complex, but the benefits for businesses are significant. Not only can businesses carry back losses to reduce their taxes, they can also carry them forward to reduce income in future years. This helps ensure that businesses with volatile profits can stay competitive in the market, even when they incur losses.