how a net operating loss nol works
a net operating loss is a tax attribute that can be carried forward to offset taxable income in future years to reduce a company s future tax liability the purpose behind this tax provision is to allow some form of tax relief when a company loses money in a tax period the irs recognizes that some companies business profits are cyclical in nature and not in line with a standard tax year 1nol carryforwards are recorded as an asset on the company s general ledger they offer a benefit to the company in the form of future tax liability savings a deferred tax asset is created for the nol carryforward which is offset against net income in future years the deferred tax asset account is drawn down each year not to exceed 80 of net income in any one of the subsequent years until the balance is exhausted 1a farming business for example may have significant profits and a large tax payment in one year then incur an nol in the next followed by another profitable year to smooth the tax burden the loss carryforward provision allows for the nol in the second year to offset taxes due in the third year 