Legal Definitions - net operating loss (NOL)

A net operating loss (NOL) occurs when a company's expenses are greater than its income for a given year. This means that the company has a negative taxable income. The Internal Revenue Code defines NOL as "the excess of the deductions allowed by this chapter over the gross income."

For example, if a company has $100,000 in expenses and only $80,000 in revenue, it would have a net operating loss of $20,000.

When a company has an NOL, it can use it to offset its taxable income in other years. This is called a carryback or carryover. For instance, if a company has an NOL of $20,000 in year one and a taxable income of $50,000 in year two, it can use the NOL to reduce its taxable income to $30,000.

However, there are limits to how much of the NOL can be used in a given year. The deduction is limited to 80% of taxable income.

Overall, an NOL can be a helpful tool for companies that experience a loss in a given year. It allows them to reduce their tax liability in future years and potentially improve their financial situation.