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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.

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About Vincent Perdiguez

The above article was shared by Vincent on this website. He is currently working as a government employee. He is an accountant by profession and his field of interest is audit and taxation. He is writing about business and he loves sharing his knowledge. He is also a practicing Christian and loves to talk about the Bible. He is an active promoter of the 1611 King James Bible. You can reach him through email at cpadavao@gmail.com or through mobile number +63-916-276-4585. You can also post your comments or suggestions about the subject below. Thank you for subscribing to us!
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34 (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. Good Evening Sir, what if mas lower pa po yung net income kaysa sa personal exemption, maaapply po ba ang NOLCO?

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    5. 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.

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    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
    2. Hi Sir,
      What is the journal entry when treating NOLCO as Deferred Tax Asset? Thanks.

      Delete
  5. Hi Sir,

    What would be the corresponding entry to record the NOLCO in the
    book?

    ReplyDelete
  6. Hi Sir,

    What would be the corresponding entry to record the NOLCO in the
    book?

    ReplyDelete
  7. Hi Sir,
    I would like to ask what would be the entry to record NOLCO in the book and the entry to apply NOLCO a certain period?
    Many Thanks..

    ReplyDelete
  8. Hi po, ask ko lng po Sir pano inaapply ung NOLCO sa preferential rate (ROHQ, filing 1702MX) sa income tax returns (eBIR form) sa regular income column (30%) kasi lumalabas ung NOLCO pag inapply, imbis na sa 10% (preferential). Thanks.

    ReplyDelete
  9. how to compute the nolco po? if P100,000 po yung loss, 100k din po ba ang nolco o hindi po?

    ReplyDelete
  10. ask lng po for purposes of computing earnings per share which nt income should i use, income after the effect of nolco or income before the effect of nolco. tnx po

    ReplyDelete
  11. Hi Sir, Good day!

    Can I claim Nolco on my second year of operation even if I opted for OSD on my second year of operation? Thank you.

    ReplyDelete
  12. Hi Sir,

    we are applying for sec accreditation and we were questioned with our computation of income tax. Our company deducted NOLCO and in the process have zero taxable income so we computed for MCIT. The reviewer's argument citing 14-2001... "that you cannot enjoy NOLCO if you are paying MCIT". after explaining our side, her reply was our reply on that matter is not meritorious... is our computation correct. we applied NOLCO first then computed for MCIT.

    ReplyDelete
  13. Am i right in understanding, that in case there is net operating loss, PERSONAL EXEMPTION IS NOT INCLUDED? (amount to carry forward for the next year should not include personal exemption?)

    ReplyDelete
  14. Hindi na po maclaim ang personal exemption kung ang result ng business ay loss? Ang maari maclaim next year ay ang net operating loss?

    ReplyDelete
  15. Hi sir,

    I have a question po.
    In computing the DTA from NOLCO sa sole prop.
    Graduated income tax rate po ba gagamitin? or 30% Regular Income Tax Rate?

    ty

    ReplyDelete
  16. hi, would like to ask if may income tax benefit/ deferred tax asset din ba if an individual taxpayer is in net loss? should i consider personal and additional exemptions or ignore it kasi loss na? if for example i'm at net loss of 2M with 2 qualified dependents. how much po net loss should reflect sa balance sheet ko?

    thank you

    ReplyDelete
  17. hi, how to compute for deferred tax asset if the taxpayer is individual.
    net loss is (2,485,535.62), with 2 dependents (below 21yo).
    thank you

    ReplyDelete
  18. Let us say, i have been operating for 2 years and laging may taxable income ako. then on the 3rd year, i incurred a net loss. can i claim my net loss as deduction on the forth year?

    ReplyDelete
  19. Good day po. thanks po sa illustrations. Sir pwede po ba sabay na iclaim yung NOLCO at MCIT carry over?

    ReplyDelete
  20. Sir additional din po. Yung NOLCO po ba na pwedeng i-carry over ay yung Loss from Operations? kasi sa isang blog po yung NOLCO niya is 30% of Loss from Operations. Tapos sa following years, binawas pa nya yung Tax paid quarterly & creditable withholding tax which is parang ang liit na ng inapply na NOLCO nya. Link: https://taxandaccountingconsultancy.wordpress.com/2014/03/26/net-operating-loss-carry-over-rr-14-2001/

    ReplyDelete
  21. good day po sir, ano po effect ng NOLCO sa financial statements? like Balance sheet? If may NOLCO po, let say, Net loss of 100,000. ano po effect niya as a whole?

    ReplyDelete
  22. Good day everyone! Ill just want to confirm if I have three business on my name as a sole proprietorship, can i just consolidate it and report in 1701q every quarter and 1701 every year under bir tin number 000? please confirm.

    Is it understandable with the BIR that I consolidate it or have to inform them, its for three business. thanks.

    ReplyDelete
    Replies
    1. Hello Sir:

      Income Tax (1701Q/1701) for a sole proprietorship business is consolidated and reported through the TIN of the main/head office -000. It is not necessary for the branch -001 and -002 to file any 1701Q/1701. The filing of the head office -000 is sufficient. To verify this, please check the Certificate of Registration (COR, Form 2303) of the head office and branches. From there, you will see that the head office has the only TAX TYPE - Income Tax while the branches do not have that kind of tax type. It is the tax types in the COR that are the official tax obligations of the registered head office and/or branches. So please check your TAX TYPES in the Form 2303, that would be your official basis for the tax obligations of that registered head office/branches.

      Delete