When you are just starting your business, it is normal to operate in the red at a Net Operating Loss (NOL) during the first few years. The good news is you can carry over that loss and offset it against the corporation’s future income. This carry over describes Net Operating Loss Carry Over (NOLCO).
How do business owners compute NOLCO? If the corporation’s NOLCO is greater than the taxable income, such corporation must compute its modified taxable income. When figuring its modified taxable income, corporations follow the same way it figures its taxable income with the following exceptions:
- It can deduct NOLs only from years before the year the carryover is being figured
- The corporation must figure its deduction for charitable contributions without considering any NOLCOs
Updates to Carryover
Before the passing of Tax Cuts and Jobs Act in December 2017, businesses could carry over net operating loss for up to 20 years after the year the loss was generated. Corporations could offset 100% of their regular taxable income with a NOLCO.
Now NOLCO can apply to only 80% of the company’s taxable income. However, the carry over period is indefinite. Owners could carry back up to two years before the year NOL was generated under the old rule. Corporations would use this strategy to claim tax refunds on the years prior to the NOL with a tax due payment. NOL carry back is no longer an option. It is important to note that the new rule applies to NOL generated beginning 2018. Pre-2018 losses follow the old rule.