Net Operating Losses (NOLs) and §382 Limitations After M&A
Written by Aparna Devalla, CPA
Curated by Rubric Financial
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What an NOL Is and Why You Care
- A Net Operating Loss (NOL) is the tax-deductible loss accumulated when business expenses exceed revenue. It carries forward indefinitely (post-2017 TCJA) and can offset future taxable income.
- For startups: NOLs are real assets. A company with $20M of NOLs that becomes profitable later can shield $20M of future taxable income, saving up to $4-5M in federal taxes (and more if state NOLs apply).
- NOLs DON'T show up on the balance sheet (they're 'off-books') but are tracked on Form 1120 Schedule K and reported in the company's tax records. Acquirers always check NOL balances during diligence.
- Annual deduction cap (post-TCJA): NOLs can offset 80% of taxable income per year, not 100%. The remaining 20% is taxed at the corporate rate. Plan accordingly.
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