What defines a "net operating loss" (NOL)?

A "net operating loss" (NOL) occurs when a business has allowable tax deductions that exceed its taxable income for a specific tax period. This scenario typically arises when a company incurs significant expenses that surpass the income it generated, leading to a negative taxable income. This negative income can often be carried back to previous tax years or carried forward to offset taxable income in future years, providing potential tax relief.

The concept of NOL is critical for businesses as it can strategically affect their tax obligations over time and provide a financial cushion during periods of economic downturn or increased expenses. By utilizing NOLs, companies can improve cash flow and maintain operations despite losses, enhancing their long-term viability and stability.

This definition highlights the importance of understanding how tax deductions interact with income levels, which is a fundamental aspect of tax planning for any business.