Let’s say you started a business, ran it straight into the ground, and lost millions. That’s unfortunate. Most people would learn from it, move on, and get a job that comes with dental.
But if you’re a corporation, the tax code says:
“Hey buddy — don’t worry. We’ll let you deduct those losses. Not just now. Forever.”
Welcome to the magical world of loss carryforwards, where bad years make future good years disappear — at least as far as taxes go.
What Is a Net Operating Loss Carryforward?
A Net Operating Loss (NOL) happens when your business deductions exceed income in a given year.
In human speak:
“We lost money. Not fake VC pitch-deck money. Real, CPA-certified, ‘let’s turn the lights off’ kind of money.”
But rather than simply accept that reality like a grown-up, the U.S. tax code steps in and says:
“Shhh. It’s not over. Let’s use that sadness to cancel out your future success.”
With an NOL carryforward, your past losses can be applied to future years, reducing how much taxable income you report — and more importantly, how much you pay Uncle Sam.
How It Works
Let’s run through a completely fictional scenario involving our good friend MegaCorp:
- 2020: MegaCorp loses $100 million
- 2021: MegaCorp makes $80 million in taxable income
Instead of writing a check to the IRS in 2021, MegaCorp applies its $100M loss from 2020 and wipes out all of 2021’s profits. No tax due. Nothing. Nada.
That leftover $20 million in unused loss?
It gets neatly packed up in Tupperware and stored for future tax seasons — 2022, 2023, 2033… until it’s all used up.
Under current law:
- You can’t carry losses backward (with some very narrow exceptions)
- But you can carry them forward indefinitely
- And you can use them to offset up to 80% of taxable income in any future year
So even if your business is now a money-printing machine, the IRS still has to tiptoe around your balance sheet like:
“Oh right, you’re still emotionally recovering from 2010. Carry on.”
Why This Matters
Loss carryforwards are like emotional baggage — except yours comes with tax deductions. And unlike depreciation, which at least requires you to buy things, NOLs reward you for just… losing.
This is the tax code’s version of:
“Fake it until you make it. Then keep faking it for tax purposes.”
It’s one of the most common (and quietly powerful) ways that profitable corporations avoid taxes — by weaponizing their darkest timeline.
Real-World Example: Delta Air Lines
Back in the early 2000s, and again during the Great Recession, Delta crashed hard — financially, not aerodynamically (mostly).
They racked up billions in losses, and by the time they became profitable again, they had built a towering wall of NOLs:
- At one point, Delta had $15 billion in carryforward losses
- Result: No federal income tax for years
It’s like running up a massive buffet tab when no one else is around — then getting to eat free for a decade because you “had it rough back then.”
And It’s Not Just Airlines
- Amazon: The OG of “we’re reinvesting everything” managed to report losses in its early years, then used them to suppress taxes during its rise to global dominance.
- Tesla: Was profitable, but still enjoyed multiple years of $0 federal tax thanks to — you guessed it — carryforwards and friends.
- Startups: Routinely collect NOLs like Pokémon cards, praying one day they’ll evolve into a Charizard of tax avoidance.
- Loss Trafficking: And here’s the real kicker — you can buy a company just to use its losses. It’s called a loss trafficking acquisition, and while the IRS technically has rules to stop abuse (see IRC §382), if you’ve got enough lawyers, those losses can become your next offshore tax haven with a friendly chatbot.
Buying and Selling Losses (Yes, This Is a Thing)
Let’s say you’re running a profitable company and taxes are ruining your vibe.
And you notice there’s a sad little shell of a business over there that used to exist solely to lose money. Guess what?
You can buy the company. Not for its assets, not for its operations — but for its tax losses.
That’s called a loss trafficking acquisition.
Here’s how it works:
- Step 1: You acquire a company with a big pile of unused NOLs
- Step 2: You structure the deal to comply (or appear to comply) with IRC §382 — the part of the tax code that tries to stop you from doing exactly this
- Step 3: You merge operations, shift income, and voilà: losses are now part of your tax strategy
Technically, there are limits on how much of those losses you can use post-acquisition.
But — spoiler — if your lawyers are sufficiently caffeinated, you can restructure ownership and valuations in ways that squeeze a surprising amount of juice out of that very dead lemon.
And in some cases, this isn’t even about M&A. In bankruptcy proceedings, NOLs become a bargaining chip. Hedge funds have bought distressed companies just to get the losses. It’s not corporate rehabilitation — it’s tax rehab with an exit strategy.
Why It’s a Problem (Maybe)
Loss carryforwards sound fair in theory. Businesses should be able to smooth out earnings across good and bad years, right?
But in practice:
- They give long-term tax holidays to companies making billions
- They allow tax avoidance long after the losses are ancient history
- They can be bought, sold, and surgically engineered
- And they don’t appear on earnings reports until used — so no one knows a company’s true tax position until much later
It’s the difference between being broke and strategically broke — which, for the record, Wall Street finds very attractive.
Coming Up in Part 4…
Next time, we’ll talk about transfer pricing and foreign subsidiaries, aka:
“We didn’t make any money in America. Our Irish subsidiary named after a cereal mascot did.”
Get ready for the part where multinationals pretend their most profitable work is done in countries with four accountants, one post office, and a flat 2% corporate tax rate.
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