In today’s ever-shifting tax landscape, Filipino business owners and finance professionals must stay informed to take advantage of every tax-saving opportunity. One such opportunity—often misunderstood or underutilized—is the Net Operating Loss Carry-Over, or NOLCO.
Especially relevant amid economic challenges, NOLCO offers a lifeline to businesses experiencing losses. With significant updates under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, and recent BIR issuances, understanding NOLCO is essential to optimizing your tax strategy in 2025 and beyond.
This blog will explore what NOLCO is, its legal framework, pandemic-related changes, and the latest updates from the Bureau of Internal Revenue (BIR)—all in a practical and easy-to-understand way for Filipino businesses.
What is NOLCO? A Lifeline for Struggling Businesses
The Net Operating Loss Carry-Over (NOLCO) is a tax provision under Section 34(D)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended. It allows businesses to carry over their net operating losses (excess of deductible expenses over gross income) to the succeeding taxable years and deduct it from future profits.
In simple terms, if your business incurred a loss in a particular year, you can offset that loss against future taxable income—reducing your tax due for those future years.
Who Can Use NOLCO?
NOLCO is available to:
- Taxpayers subject to regular income tax under the graduated rates.
- Corporations that are not enjoying tax-exempt or preferential income tax rates (e.g., BOI or PEZA-registered companies under tax holidays or 5% GIE).
- Sole proprietors and professionals (provided they opt for itemized deductions).
However, those under the optional standard deduction (OSD) method or availing special income tax regimes are not entitled to use NOLCO.
Pre-Pandemic: The 3-Year Rule Under TRAIN
Although the TRAIN Law (RA 10963) ushered in several tax reforms when it took effect in 2018—like personal income tax cuts and increased VAT exemption thresholds—it did not change the standard treatment of NOLCO.
Under TRAIN and previous tax laws, NOLCO could be carried over for three (3) consecutive taxable years immediately following the year of the loss. Any unused portion beyond that period would expire.
For example, a loss incurred in 2018 could be carried over and deducted until 2021.
Temporary Relief: CREATE Act’s Five-Year NOLCO Rule (For 2020 and 2021 Only)
The real game-changer came with the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, enacted in March 2021 as RA 11534.
In response to the economic devastation brought about by the COVID-19 pandemic, CREATE introduced a temporary extension of the NOLCO carry-over period from 3 years to 5 years—but only for losses incurred during the pandemic years:
- Taxable year 2020
- Taxable year 2021
This means that:
- A net loss in 2020 can be carried forward until 2025
- A net loss in 2021 can be carried forward until 2026
Important Clarification: The five-year extension is a temporary pandemic relief measure. For losses incurred in 2022 onwards, the regular 3-year carry-over rule applies again, unless further legislation amends the NIRC.
Why NOLCO Matters for Business Strategy
NOLCO is not just a technical accounting item—it’s a strategic tax tool. Here's why:
- Reduces Tax Liabilities in Future Profitable Years: By deducting past losses, businesses can reduce their taxable income in good years.
- Improves Cash Flow: Lower taxes mean more cash available for operations, investment, or debt repayment.
- Encourages Long-Term Planning: NOLCO promotes a forward-looking approach, especially in recovery phases post-crisis.
BIR Guidelines: Compliance is Key
To operationalize the changes under the CREATE Act, the BIR released several issuances that clarified how taxpayers should apply NOLCO:
1. Revenue Regulations No. 5-2021
- Formalized the five-year NOLCO extension for 2020 and 2021.
- Stressed that only taxpayers not subject to special income tax regimes can avail of the extended NOLCO.
2. Revenue Memorandum Circular No. 29-2021
- Issued FAQs to clarify issues, such as:
- Losses must be properly reflected in the Income Tax Return (ITR) and audited financial statements (AFS).
- The NOLCO should be tracked per year and should not be mingled with ordinary 3-year NOLCOs.
3. Revenue Memorandum Circular No. 39-2022
- Reinforced the principle that NOLCO cannot be applied if the taxpayer is availing special income tax rates, like the 5% Gross Income Tax (GIT).
Documentation Tip: You must prepare a detailed NOLCO schedule attached to your financial statements, and maintain audit-ready files showing:
- Year the NOLCO originated
- Amount carried over
- Amount applied per year
- Expiry year
Common Pitfalls to Avoid
Many taxpayers lose out on NOLCO benefits because of avoidable errors. Here are some red flags to watch out for:
- Failing to declare NOLCO in the ITR or financial statements
- Switching to OSD midstream, thereby disqualifying previous NOLCO claims
- Availing both NOLCO and tax incentives at the same time (which is generally disallowed)
- Overstating deductions that BIR could disallow during audit, thereby invalidating claimed NOLCO
Post-Pandemic Outlook: What to Expect Moving Forward
As the Philippines moves toward economic recovery, businesses must adjust to the return of the 3-year NOLCO rule. There are no current legislative proposals extending the 5-year carry-over beyond the pandemic period.
However, tax policy in the Philippines continues to evolve. With global economic shifts and national development plans in play, further tax reforms could eventually reshape NOLCO treatment again.
In the meantime, businesses are encouraged to:
- Maximize any remaining NOLCO from 2020 and 2021
- Strategically plan deductions and income recognition
- Ensure compliance with the latest BIR filing requirements
Final Thoughts: Turn Losses into Strategic Assets
The NOLCO provision, while often buried in the technical details of the tax code, is a powerful ally for businesses—especially during recovery periods. Whether you’re a large corporation or a growing enterprise, understanding how and when to apply your net operating losses can make a real difference in your bottom line.
With the temporary 5-year carry-over now in its winding years and the BIR actively monitoring compliance, now is the time to review your past losses, plan ahead, and consult with your tax advisors to make the most of what NOLCO can offer.
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