how to calculate net operating loss nol 
net operating loss is calculated by subtracting allowable tax deductions from taxable income if the resulting figure is negative there s a net operating loss when this happens the business can carry some of its tax deductions forward to years when it has a profit a net operating loss sometimes called a net loss appears on the company s bottom line or income statement net operating loss nol tax law changesnet operating loss has been subject to several tax law changes over the past few years before the implementation of the tax cuts and jobs act tcja in 2018 the irs allowed businesses to carry net operating losses forward 20 years to net against future profits and backward two years for an immediate refund of previous taxes paid because the time value of money shows that tax savings in the present are more valuable than in the future the carryback method was generally used first followed by the carryforward method after carrying losses forward for 20 years any remaining losses expired and could no longer be used to reduce taxable income 2in 2017 the tax cuts and jobs act tcja made significant changes to the laws regarding net operating losses the tcja removed the two year carryback provision for tax years beginning jan 1 2018 or later except for certain farming losses but allowed for an indefinite carryforward period however the carryforwards are now limited to 80 of each subsequent year s net income if a business creates nols in more than one year they are to be drawn down completely in the order that they were incurred before drawing down another nol 3the coronavirus aid relief and economic security cares act effectively suspended the changes made by the tcja the pandemic relief bill allowed nols arising in tax years beginning in 2018 2019 and 2020 to be carried back for a period of five years and carried forward indefinitely however those special exceptions have now expired 1losses originating in tax years beginning before jan 1 2018 are still subject to the former tax rules any remaining losses will expire after 20 years 4net operating loss nol carryforward exampleimagine a company that had an nol of 5 million one year and a taxable income of 6 million the next the carryover limit of 80 of 6 million is 4 8 million the full loss from the first year can be carried forward on the balance sheet to the second year as a deferred tax asset the loss limited to 80 of income in the second year can then be used in the second year as an expense on the income statement it lowers net income and therefore the taxable income for the second year to 1 2 million 6 million 4 8 million a 200 000 deferred tax asset does not directly represent the net operating loss nol balance but rather the anticipated tax benefit from carrying forward the nol to offset taxable income in future periods net operating loss nol carryforward limitationsa net operating loss is a valuable asset because it can lower a company s future taxable income for this reason the irs restricts using an acquired company simply for its nol s tax benefits section 382 of the internal revenue code states that if a company with an nol has at least a 50 ownership change the acquiring company may use only part of the nol in each concurrent year however purchasing a business with a substantial nol may mean a larger sum of money going to the acquired company s shareholders than if the acquired company possessed a smaller nol 5