ABSTRACT

Tax Treatment and Economics of Net Operating Losses [Updated October 19, 2020]   [open pdf - 1MB]

From the Summary: "This report provides an overview of the tax treatment and economics of net operating losses (NOLs). How losses are treated for tax purposes can have important implications for capital investment because such investment is rarely a risk-free endeavor, and therefore the possibility of incurring a loss exists. Allowing firms to receive a refund for taxes paid in previous years, known as 'carrying back' a loss, can increase economic efficiency and therefore may be a desirable feature of the permanent tax system. The tax treatment of losses also affects the ability of firms to smooth income over the business cycle, and, in some cases, survive economic downturns. Thus, loss carrybacks can act as an automatic stabilizer when the economy begins to weaken. The stimulus effect of such policy, however, is typically estimated to be low relative to other options. Allowing losses to only be carried forward to reduce future taxes may be desirable if there is concern that some firms will engineer paper losses to benefit from loss carrybacks and that detecting this behavior is difficult. However, loss carryforwards may provide limited assistance to firms experiencing real losses and that would benefit from the liquidity that loss carrybacks can provide."

Report Number:
CRS Report for Congress, R46377
Author:
Publisher:
Date:
2020-10-19
Copyright:
Public Domain
Retrieved From:
Congressional Research Service: https://crsreports.congress.gov/
Format:
pdf
Media Type:
application/pdf
URL:
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