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.