The Tax Treatment of Net Operating Losses: In Brief (CRS Report for Congress)
Premium Purchase PDF for $24.95 (10 pages)
add to cart or
subscribe for unlimited access
Pro Premium subscribers have free access to our full library of CRS reports.
Subscribe today, or
request a demo to learn more.
| Release Date |
Oct. 4, 2017 |
| Report Number |
R44976 |
| Report Type |
Report |
| Authors |
Mark P. Keightley, Analyst in Public Finance |
| Source Agency |
Congressional Research Service |
Summary:
Tax reform could result in any number of changes to current tax policy. One modification that could occur is the tax treatment of net operating losses (NOLs). An NOL is incurred when a business taxpayer has negative taxable income. A business has no tax liability in the year they incur a loss. Additionally, a loss can be "carried back" for a refund on taxes paid in the past two years or "carried forward" for up to 20 years to reduce future taxes. The intent of the NOL carryback and carryforward regime is to give taxpayers the ability to smooth out changes in business income, and therefore taxes, over the business cycle. Allowing losses to offset past or future income may also reduce the distorting effects of taxation, and promote investment and economic efficiency.
This report provides an overview of the current tax treatment of NOLs as well as a brief legislative history. The report also explains the mechanics by which losses can be used to receive a refund for taxes paid in the past, or to reduce taxes owed in the future. The report concludes by reviewing several policy options and considerations that Congress may find useful as they continue to debate tax reform, including extending the carryback period, allowing an immediate tax refund for losses, and allowing interest to accrue on losses that are carried forward. Any of these changes could enhance the ability to smooth income and economic efficiency depending on their design, but would also reduce federal revenue.
This report will be updated in the event of legislative changes.
