NOLCO Flashcards
Net Operating Loss
excess of allowable deductions over the gross income from business or exercise of a profession during a taxable year
NOLCO
amount of net operating loss that is allowed by the law to be carried over as deduction against available net income in the following three years
NOL vs NOLCO
Net operating loss may occur but may not be carried over, hence, no NOLCO. However, a NOLCO cannot exists without a prior year NOL
What is the rationale of NOLCO?
Intended to allow the taxpayer to recoup his losses before taxation goes full swing. Without NOLCO, income taxation would result in taxation of recoveries of lost capital.
Who can claim NOLCO?
All taxpayers subject to tax on taxable income whether at the regular income tax or at preferential tax rate can deduct NOLCO.
Who cannot claim NOLCO?
Taxpayers who are exempt, enjoying a tax holiday, subject to tax on gross income, or those subject to final income tax.
Treatment of NOLCO
NOLCO is treated as a separate item of deduction in the next 3 consecutive taxable years to the extent of the available net income before NOLCO deductions in those periods.
What is the changes amended in the CREATE law during the pandemic?
CREATE law allowed NOLCO incurred during taxable years 2020 and 2021 to be carried over for 5 years. For taxpayers on fiscal basis, NOLCO for the fiscal year ending on or before June 30, 2021 and June 30, 2022 will be carried over 5 years. NOLCO incurred after this two year period will revert back to the original 3 year carry-over period.
Requisites for the deductibility of NOLCO
- The taxpayer must not be exempt from income tax during the taxable year when the NOLCO was incurred.
- There has been no substantial change in the ownership of the business enterprise.
What is deemed substantial change in the business ownership?
A change of at least 75% of either the paid up capital or nominal value of the outstanding shares of a corporation.
Rationale of the Disallowance of Carry-over Net Operating Loss
Deductions are of no benefit to the taxpayer in an exempt year. Hence, the net operating loss from an exempt year should not be given value by carry-over as this would cause undue enrichment to the taxpayer.
Rationale of the Rule on Substantial Change in Ownership
When there is a substantial change in the business ownership, NOLCO is no longer allowed because the owners for whom the loss recoupment is intended are no longer in the business. NOLCO is a privilege that is not transferrable.
Rules in carry-over of NOLCO
- NOLCO is claimable in FIFO fashion
- NOLCO can be claimed only up to the extent of the business net income in the next three years. Prior year NOLCO cannot be deducted against a subsequent year net operating loss.
- Any NOLCO which remains unused at the end of the three year prescriptive period will expire.
NOLCO for individual taxpayers
NOLCO refers to an operating loss from business or exercise of a profession. For individuals who are mixed income earners, NOLCO is measured by separating compensation income from business or professional income following the income classification and globalization rule.
