What are the tax implications of a net operating loss
Class Discussion Question
#1. In general terms, net operating loss is a loss that results when a company’s expenses exceed its income. What are the tax implications of a net operating loss? For how long can an organization carry forward a net operating loss? Why do you think is so?
Student Response Post
#2. When a company has greater tax deductions than taxable income they experience a net operating loss. This essentially creates a tax break for the company that can be applied to the two previous tax bills or for up to 20 years in the future. From an accounting perspective, the NOL is recorded as an asset, similar to accounts receivable, because it is money “owed” to the company that can be used to directly offset deferred tax debts. If more than a 50% ownership change occurs before the full NOL tax benefit is used, only a portion of the asset can be retained. This is in place to deter acquisitions made for the sole purpose of a substantial tax benefit. Its main purpose is to give tax breaks to businesses that have bad years and help get them back on their feet. NOL may be carried forward for up to 20 years following the year of the NOL. The available tax benefit expires after that point. I think the length of time the benefit can be used is so long so that new businesses have the ability to get started and create more growth for the economy. It is not in the interest of the government (IRS) to suppress the economy, for the most part, so they do what they can to encourage new businesses.
Reference
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting (16th ed.). Retrieved from The University of Phoenix eBook Collection database.
#3. Prior to 2018 a net operating loss could be carried back two years and carried-forward twenty years. Also, a company could choose only carry-forward the loss and give up the ability to carry it back the two previous years. Under the Tax Cuts and Jobs Act the treatment of Net Operating Losses have changed. There is no ability to carry back the loss and it can only be carried forward. Also, whereas the loss used to be taken against total income, it is now limited to 80% of the income; therefore companies are still going to have to pay some taxes no mater how much of a loss they are carrying. However, the NOL loss can be carried forward indefinitely. The new tax law was supposed to simplify taxes, that is why they raised the standard deduction and removed exemptions. I believe the changes to the treatment of NOL are also to simplify taxes. Companies can no longer go back and amend the prior two years when they take a loss (the government has to pay the company back the taxes that it collected).
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