Did you miss an article? We'll send you
new articles and updates to your inbox...



What Is Meant By Net Operating Loss Carry-Over or NOLCO In Taxation?

There was a question as to what is the Net Operating Loss Carry-Over (NOLCO) found in some BIR Forms like BIR Form 1701, BIR Form 1702-RT, and BIR Form 1702-MX. We can see the computation of NOLCO in the said forms on either Schedule 6, 7 or 8. What is NOLCO? And why should I bother knowing it?


According to Section 34-D.3 of the National Internal Revenue Code (NIRC), net operating loss carry-over (NOLCO) shall mean the excess of allowable deductions over business gross income in a taxable year. Accordingly, the net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction. Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that - Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or  Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. In special cases, for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four (4) years.

We can see that NOLCO is a kind of deduction applicable to business income but not to compensation income. The NOLCO of the business shall be carried over as a special deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss.

According to BIR Revenue Regulation No 14-2001, NOLCO is not part of the itemized deductions. Furthermore, an individual who claims the 10% optional standard deduction (OSD) shall not simultaneously claim deduction of the NOLCO. The three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid taxpayer availed of the OSD during the said period. Domestic and resident foreign corporations subject to 2% MCIT in any taxable year cannot enjoy the benefit of NOLCO. However, the running of the three-year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such three-year period. Section 2.7 of the said revenue regulation states that NOLCO shall be availed of on a “first-in, first-out” basis. NOLCO shall be allowed as deduction in computing the taxpayer's income taxes per quarter and annual final adjustment income tax returns.

Revenue Regulation 14-2001 further states the following entities are not entitled to claim deduction of NOLCO:

1. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP);

2. An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO;

3. An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916, as amended, with respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO.

4. An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its business activity. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO;

5. Foreign corporations engaged  in international shipping or air carriage business in the Philippines; and,

6. In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO.

The following are taxpayers entitled to deduct NOLCO from Gross Income:

1. Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession.

2. Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders).

3. Corporations subject to preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) on their taxable income.


Illustration: Jeffrey Abednego, single, an employee with a small business, reported the following income and expenses during the taxable years:

2015 2016 2017 2018 2019
Salary as bookkeeper P 216,000 216,000 220,000 220,000 224,000
Business Income, gross P 350,000 300,000 380,000 400,000 350,000
Business Deductions P 550,000 220,000 310,000 380,000 250,000

Question : How much is the taxable income before personal exemption for Mr. Abednego for the said taxable years?

Mr. Abednego' taxable income before personal exemption for the said taxable years would be the following:


2015 2016 2017 2018 2019
Business Income, gross P 350,000 300,000 380,000 400,000 350,000
Business Deductions (550,000) (220,000) (310,000) (380,000) (250,000)
Income (loss) From Business (200,000) 80,000 70,000 20,000 100,000
Less: Applicable NOLCO            0   (80,000) (70,000) (20,000)           0   
Business Income (Loss), net (200,000) (      0   ) (     0    ) (       0   ) 100,000
Salary as bookkeeper  216,000 216,000 220,000 220,000 224,000
Taxable Income (Before Exemption)  216,000 216,000 220,000 220,000 324,000

The taxable income before exemption includes the income from business after considering the NOLCO and the income from compensation. NOLCO cannot be deducted against the compensation income but to the business income. In 2019, there would be a remaining loss from 2015 amounting to P30,000. This cannot be deducted from the business income in the year 2019 because the three-year reglementary period has already expired.

Disclaimer : Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information only and are not substitute for advice from qualified professional or an expert opinion. Contact support@cpadavao.com for more information and/or if you want to avail professional services from a qualified professional. This site accepts and publishes contributions from accountants and business professionals, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. Please email your articles to publisher@cpadavao.com together with your bio and affiliations for publication in this website.


Did you miss an article?
Subscribe now, and we'll notify you
of our new articles and updates through email...



Share on Google Plus

About Vincent Perdiguez

CPADavao.com is a "business blog" maintained by Mr. Vincent C. Perdiguez. Vincent is an accountant by profession. He has a passion of writing about accounting, business and the profession. He is an alumnus of the Mindanao State University - Iligan Institute of Technology (MSU-IIT). He has been working as a bookkeeper and internal auditor of small and medium businesses here in Davao City and is currently working as a government employee. You can reach him through mobile at 0916-2764-585 (Globe) or by email to vincent.perdiguez@cpadavao.com. Thank you for subscribing to us.
    Blogger Comment
    Facebook Comment

13 (mga) komento:

  1. Good day!

    if I may ask, can we not claim the NOLCO following the year of its incurrence? or can we opt not to claim it at all during the 3 years period?

    Thank you po.

    ReplyDelete
    Replies
    1. Hi good day po sa inyo, bakit po naman ayaw ninyong e-claim ang NOLCO? Sayang naman. NOLCO is a benefit or a privilege to offset the previous year's loss. Hanggang three (3) years lang ang pwede, pag di pa rin naubos o na-offset at umabot sa fourth year, forfeited na po ito. So its beneficial to the business owner. Claim po ninyo, sayang naman.

      Delete
    2. Tungkol sa tanong na kung pwede ba or can we opt not to claim, syempre pwede naman, bakit hindi..

      Delete
    3. Good evening po, what if ang taxable income ay lower kaysa sa personal exemption, mayron po bang tax due?

      Delete
    4. obviously no more income tax due... :)

      Delete
  2. Good day sir, kung may NOLCO ako last year ma-claim ko po ba sya sa 1701q or sa 1701 na, sa end pa ng taon? thanks po.

    ReplyDelete
    Replies
    1. Hi po, good day din po sa inyo. Pwede po tayong maka-claim ng NOLCO sa 1701Q and then annual final adjustment income tax returns sa 1701. Pwede po yan ma-claim as deduction in Item 33 sa 1701Q at Item 59 sa 1701.

      Ito po sinabi sa RR No. 14-2001 Section 6.4 "Quarterly and Annual Availment of NOLCO. NOLCO shall be allowed as deduction in computing the taxpayers' income taxes per quarter and annual final adjustment income tax returns: Provided, however, that if per the taxpayers' final adjustment annual income tax return, the entire operations for the year resulted to a net operating loss, such net operating loss may be claimed as NOLCO deduction in the immediately succeeding taxable year. Provided further, that NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable years immediately following the year the net operating loss was sustained or incurred....." Yun po.... :)

      Delete
  3. Hi Sir, Good Day!

    Ang Tanong ko po ay hindi connected sa NOLCO.Ito po ay tungkol sa INPUT TAX on ZERO RATED SALES. Dalawang uri po kasi ang sales, REGULAR SALES and ZERO SALES. Ang tanong ko po, kailangan pa po ba ng TAX CREDIT CERTIFICATE before maededuct ang INPUT TAX ng ZERO RATED SALES against OUT PUT TAX ng REGULAR SALES? mayron dn po kasing ng sasabi n for TAX REFUND lng po dw talaga ang INPUT TAX ng ZERO RATED SALES. THANK YOU.

    ReplyDelete
    Replies
    1. My answer is YES. Here's the result of my research, please do validate this one. Thanks.

      Section 112(A) of the 1997 Tax Code, as amended, provides for the remedy of a taxpayer to recover the unapplied accumulated input VAT arising from zero-rated transactions:

      Excess Output or Input Tax. - If at the end of any taxable quarter
      the output tax exceeds the input tax, the excess shall be paid by the
      VAT-registered person. If the input tax exceeds the output tax, the
      excess shall be carried over to the succeeding quarter or
      quarters. Any input tax attributable to the purchase of capital goods
      or to zero-rated sales by a VAT-registered person may at his option
      be refunded or credited against other internal revenue taxes, subject
      to the provisions of Section 112.

      Zero-Rated or Effectively Zero-Rated Sales. - Any VATregistered
      person, whose sales are zero-rated or effectively zerorated
      may, within two (2) years after the close of the taxable quarter
      when the sales were made, apply for the issuance of a tax credit
      certificate or refund of creditable input tax due or paid attributable to
      such sales, except transitional input tax, to the extent that such input
      tax has not been applied against output tax:

      Delete
    2. Sir, follow up question po.since kailangan po ang TCC ano po b ang mga requirements n kailangan para mkakuha ng TAX CREDIT CERFTIFICATE (TCC).Thank you.

      Delete
    3. I think you need to fill in the BIR Form 1914 Application for Tax Credits/Refunds and please see BIR Revenue Memorandum Circular Number 54-2014 "Clarifying Issues Relative to the Application for Value Added Tax (VAT) Refund/Credit under Section 112 of the Tax Code, as amended" for additional information. Please do validate for any updates as well. Thanks.

      Delete
  4. Hello Sir, Good Day!

    Tanong ko lang po, with in 3 years ma e treat din po ba us Deferred TAX ASSET ang NOLCO? Thank you.

    ReplyDelete
    Replies
    1. When you apply the tax rate to the actual current loss, the tax equivalent of that NOLCO can be treated as Deferred Tax Asset.

      In IAS 12, deferred tax asset is defined as the amount of income taxes recoverable in future periods in respect of deductible temporary differences, carryforwards of unused tax losses, and carryforwards of unused tax credits. While, deferred tax liability is the amounts of income taxes payable in future periods in respect of taxable temporary differences.

      Under IAS 12, a deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carryforward can be utilised. [IAS 12.34]

      Delete