What are net operating losses, and how are they used?

Define an NOL as a tax loss carried forward to cut future taxable income. Give the current US federal rules, no expiry and an 80% annual cap, work a quick example, then mention the deferred tax asset and the Section 382 limit in deals.

Updated October 20, 2026

The numbers, step by step

$150 of NOLs, $100 of taxable income before using them, the 80% annual cap and a 25% tax rate.

NOLs usable this year$100 × 80%

$80

Taxable income after NOLs$100 − $80

$20

Tax paid$20 × 25%

$5

Tax saved$100 × 25% − $5

$20

NOLs carried forward$150 − $80

$70

Deferred tax asset$150 × 25%

$37.50

What the interviewer listens for

• Do you define an NOL as a tax loss that cuts future taxable income?
• Do you know the 80% limit and that recent US losses don't expire?
• Can you work an example where the cap binds?
• Do you know Section 382 limits a buyer's use of them?

Common mistakes

• Treating NOLs as cash.They save tax only in years when the company has taxable income to shelter.
• Letting NOLs wipe out all of a year's taxable income.Recent US federal losses can offset only up to 80% of it.
• Ignoring Section 382 in a deal.After an ownership change the yearly use of the target's NOLs is capped.
• Valuing NOLs at their face amount or at the full tax rate today.Their value is the discounted tax saved, year by year.

Likely follow-ups

• How would you value $100 of NOLs?At 25% they can save at most $25 of tax. I'd schedule the use under the 80% or Section 382 cap and discount each year's saving, so the value is usually well below $25.
• Does net income change when the NOLs are used?Not if the deferred tax asset was already recorded. Current tax falls, the deferred tax asset shrinks by the same amount, and only cash taxes go down.

More finance technicals

• What's the difference between cash and accrual accounting?
• What creates a deferred tax asset?
• How do you account for a 30% stake in another company?
• How do the three financial statements link together?
• Depreciation goes up by $10. Walk me through the three statements.

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