Managing taxes is critical for businesses. One important tool is understanding Net Operating Losses (NOLs).
So, what is a Net Operating Loss? An NOL occurs when a company’s tax-deductible expenses exceed its taxable income in a given year.
Essentially, the business loses money on paper, and tax rules allow it to carry that loss forward or backward to offset taxable income in other years.
Platforms like Remire can help HR and finance teams manage employee payroll alongside corporate tax planning for NOLs: Remire Payroll Management.
Understanding NOL Deductions
Why is an NOL deduction allowed?
Governments recognize that losses in one year should reduce tax burdens in profitable years.
This prevents businesses from being penalized in growth or investment phases.
Who can claim an NOL?
- Corporations
- Partnerships
- Individuals with business
- losses
- Certain estates and trusts
For HR and finance leaders, understanding which employees’ compensation or benefits affect corporate taxes is critical. Using Remire HRIS can help track these details: Remire HRIS.
How to Calculate an NOL
Net operating loss formula:
NOL = Tax-Deductible Expenses – Taxable Income
For example, a corporation earns $500,000 but has $700,000 in deductible expenses. The NOL would be $200,000.
How does this work for individuals?
If a self-employed employee has higher business expenses than income, they may generate a personal NOL, which can offset other taxable income.
Corporations can calculate NOLs using accounting and tax software. Remire’s payroll management system simplifies tracking deductions that affect NOL calculations.
NOL Carryback and Carryforward Rules
Businesses can apply NOLs in two main ways:
- Carryback: Apply the loss to previous years’ taxable income for a tax refund.
- Carry forward: Apply the loss to future taxable income to reduce taxes owed.
Example:
A company with a $100,000 NOL in 2023 can apply $50,000 to 2022 profits (carryback) and $50,000 to 2024 profits (carryforward).
Key rules to note:
- After 2017 (TCJA), NOLs can generally be carried forward indefinitely, but carrybacks are limited.
- The CARES Act temporarily allowed certain carrybacks for 2020 losses.
- An 80% limitation may apply to future taxable income when using a carry-forward.
Historical Context of NOLs
- Pre-2017: NOLs could generally be carried back two years and forward 20 years.
- TCJA (2017): Carried forward indefinitely; carrybacks limited; 80% taxable income limit for deductions.
- CARES Act (2020): Allowed five-year carrybacks for certain losses and full offset of taxable income.
For corporations navigating multiple payroll cycles and global teams, NOLs interact with employee tax reporting. Remire’s Employer Record can help streamline these processes:
Special Considerations
Corporate acquisitions and reorganizations can limit NOL use.
- Ownership changes may restrict carryforwards.
- Bankruptcy or COD (cancellation of debt) income can affect NOL calculations.
State rules: Not all states follow federal NOL rules, so planning at both levels is essential.
Deferred tax assets: NOLs can create deferred tax assets on the balance sheet, which HR and finance teams must report accurately for compliance.
Applying and Claiming NOLs
To claim an NOL:
- Calculate the NOL using your tax records.
- Decide whether to carry back or carry forward.
- Apply the NOL to reduce taxable income in other years.
- Report the NOL deduction on corporate tax returns.
Tools and Resources for NOL Management
- Practice tools and scenario planning software
- Tax calculation and ASC 740 compliance tools
- Strategic resources from Bloomberg Tax
- Corporate HRIS and payroll platforms to track employee-related deductions
The Bottom Line
Net Operating Loss (NOL) is a powerful tool for businesses to reduce taxes during profitable years.
Understanding how to calculate NOLs, apply carrybacks and carryforwards, and track employee-related deductions is essential.
Using platforms like Remire, businesses can integrate payroll, HR, and tax planning for accurate reporting and compliance
With proper planning, NOLs help companies smooth cash flow, reduce tax liability, and ensure compliance across payroll and corporate tax reporting.
