When a business reports operating expenses on its tax return that exceed its revenues, a net operating loss (NOL) has been created. An NOL can be used in some other tax reporting period as an offset to taxable income, which reduces the tax liability of the reporting entity.
The basic rules for using an NOL are:
Carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver.
Carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years.
After 20 years, any remaining NOL is cancelled.
Internal Revenue Code Section 172.