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Note: this is not about a real corporate issue, I'm more curious than anything about how corporate taxes work. I know this is "Personal Finance", but there doesn't seem to be a site specifically for corporate finance.

In a very general, high level sense. How does the following situation work? Let's use simple numbers and grossly simplify the tax issues for purposes of illustration.

Suppose you have a company that has $1000 in revenue in CY 2012. Further suppose the company has $900 in operating expenses (for simplicity, we will ignore all other tax benefits and deductions). That means they will be taxed on $100 of profit, which at the corporate rate of 25% would mean they would have $75 in after tax earnings in the bank.

Now, suppose that in CY 2013 that company had $825 in revenue but still had $900 in operating expenses. (again, ignoring all other issues and accounting magic).

Now, they would have to cover that $75 loss with the money in the bank, which was after-taxed dollars, but is applied to their operating income, which should be tax deductible.

Is this not, in effect, taxing things that should be deductible?

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This is called "Net Operating Loss", and it is in fact applicable for individuals as well. You can, under certain circumstances, have NOL even as an individual. But it is far more common in the corporate world.

What happens is that you can carry it back or forward, and get refund on taxes paid or adjust income for taxes to pay. In your example, you could carry the $75 NOL back and deduct it from the prior year earnings, reducing the taxable income from $100 to $25, getting $18.75 of the $25 paid as taxes - back.

The link is for individual NOL, corporate rules are different, but the principle is the same.

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  • So what you're saying is that you can effectively defer revenue from a previous year to the next year to cover an expected (or realized) loss?
    – Erik Funkenbusch
    Commented Oct 16, 2012 at 17:54
  • @MystereMan no, its not "deferring" revenue to the future, its applying loss to the past. But depending on your accounting methods and accountants, you can do some planning to mitigate problems ahead of time.
    – littleadv
    Commented Oct 16, 2012 at 18:01

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