How to Use NOL
Net operating losses (NOLs) occur when tax-deductible expenses exceed taxable revenue for a particular tax period. If an entity generates taxable income in a different period, the entity can use the NOLs to offset some of its tax liability, subject to certain restrictions. NOLs give tax payers a significant amount of flexibility and are consequently quite valuable.
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Instructions
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Calculating the Value of an NOL
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1
Sum up all business-related income for the current tax period. For an individual employed by a company, the business-related income will generally consist of the individual's salary and any bonuses. In the case of a company, be sure to include all income generated from the company's different business divisions.
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2
Sum up all business-related expenses. The most common business-related expenses for a company are the cost of products sold, sales and marketing expenses, corporate overhead, and salaries. For an individual, you should include all nonreimbursed business expenses, such as travel, meals and entertainment. Do not include personal expenses (such as medical expenses, alimony and charitable contributions), since these are not tax-deductible for the purposes of calculating an NOL.
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3
Subtract all business expenses from business income. The resulting negative number is the value of the NOL. For example, if you have $100,000 of business income and $120,000 of deductible business expenses, the value of the NOL is $100,000 - $120,000 = ($20,000), which is equal to $20,000 in usable NOLs.
Utilizing NOLs
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4
Verify that the NOLs you are attempting to use were generated within the past 20 years (if attempting to carry the losses forward) or within the past two years (if attempting to carry the losses back). Doublecheck the status of your NOLs by reviewing the old tax returns on which the NOLs were generated.
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5
Enter the amount of NOLs that you wish to utilize in the appropriate line of your federal tax return. For an individual, you will enter the NOL in line 53. For a company, the exact line where you enter the NOL amount will depend upon what type of tax form the company is required to fill out. Consult a tax professional if you have questions.
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6
Subtract the NOL amount from your taxable income on your tax form, and calculate your total tax liability based on this reduced number.
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Tips & Warnings
If a company that has significant NOLs is acquired, the acquiring company's ability to utilize those NOLs will be severely limited. Congress has passed a series of laws that prevent businesses from acquiring one another specifically to gain access to NOLs. Consult a tax professional or attorney before attempting to utilize the NOLs of an acquired company. Be sure to have old tax forms on hand in case the IRS requests proof of previously generated NOLs. You should be able to supply the IRS with the tax forms that contain the total amount of the NOL you are claiming.
IRS rules regarding the use of NOLs change frequently. Consult an accountant or a tax attorney before using NOLs to ensure you are complying with the most recent regulations.
