Summary
Highlights
NOLCO refers to the excess of allowable deductions over gross income in a taxable year. It's an operating loss where expenses are higher than income. The government allows NOLCO as a deduction to assist businesses, especially new ones, during their initial loss-making periods, deferring immediate tax obligations until they become profitable.
Five types of taxpayers can claim NOLCO: individuals engaged in trade or business or in the exercise of a profession, estates and trusts (taxed as individuals), domestic and resident foreign corporations subject to normal income tax, special corporations (e.g., private educational institutions, hospitals), and tourism enterprises registered with the Tourism Infrastructure and Enterprise Zone Authority (TIEZA).
NOLCO is allowed as a deduction for the same taxpayer regardless of ownership changes, provided there's no 'substantial change' in ownership (meaning 75% of shares or paid-up capital must be held by the same person). NOLCO cannot be transferred or assigned to another person or entity. It can be deducted in quarterly and annual income tax returns.
NOLCO can be carried over as a deduction for the next three consecutive years immediately following the year of the loss. An example is provided where a ₱500,000 loss in 2020 can be carried over and deducted against taxable income in 2021, 2022, and 2023, but not beyond the three-year period.
NOLCO cannot be claimed if the business opts for Optional Standard Deduction (OSD) because NOLCO arises from itemized deductions. Furthermore, NOLCO cannot be used to offset Minimum Corporate Income Tax (MCIT) if MCIT is higher than the normal income tax. The three-year carryover period does not stop even if NOLCO cannot be claimed in a particular year due to OSD or MCIT.
NOLCO should be applied on a 'first-in, first-out' (FIFO) basis if there are multiple years with losses. It must be presented as a separate line item of deductions and not included in other itemized deductions. It is also required to be shown in the reconciliation section of the tax return, with proper computation and reconciliation of the losses incurred in previous years.