Tax 3: Unit 1.

Chapter 3

Chapter 3: Net-operating loss carry-over Rationale of the rule:

Deduction incentives are not actual
Net operating loss - the excess of operating expenses. Thus, they must be
allowable deduction over the gross income excluded in the amount of net operating loss
gross income from business or exercise of a carry over.
profession during a taxable year
Prior year NOLCO, which is also a
Net operating loss carry over - pertains deduction incentive, cannot be deducted in
to the amount of net operating loss that is the measurement of the current year
allowed by the law to be carried over as NOLCO to avoid breaching the three-year
deduction against available net income in carry over rule.
the following three (3) years.
Summary of Rules:
NB: Net operating loss is different with 1. Cost of sales or cost of services and
NOLCO. A net operating loss may occur, regular allowable itemized
but may not be carried over; hence no deductions are fully deductible
NOLCO. But, a NOLCO cannot exist without against gross income
a prior year net operating loss. 2. Special incentive deductions are
deductible only to the extent of net
Rationale of NOLCO income before special incentive
NOLCO is intended to allow the taxpayer to deductions.
recoup his losses before taxation go full 3. NOLCO prior years are deductible
swing. Without NOLCO, income taxation only to the extent of net income after
would result in taxation of recoveries of lost special incentive deductions but
capital. before NOLCO.

Taxpayers who can claim NOLCO Tax treatment of NOLCO

All taxpayers subject to tax on taxable NOLCO is treated as a separate item of
income whether at the regular income tax or deduction in the next 3 consecutive taxable
at preferential tax rate can deduct NOLCO. years to the extent of the available net
income before NOLCO deduction in those
Not covered: Taxpayers who are exempt, periods.
enjoying a tax holiday, subject to tax on
gross income, or those subject to final Important provision under the CREATE Law
income tax. - NOLCO incurred during taxable
years 2020 and 2021 to be carried
Computation of NOLCO over a period of five (5) years.
Gross income subject to regular tax XX - NOLCO for fiscal year ending on or
Less: before June 30, 2021 and June 30,
Total deductions excluding 2022 will be carried over 5 years/
NOLCO from prior years - NOLCO incurred after this two-year
and deduction incentives period will revert back to the original
under special laws (xx) 3-year carry-over period.
NOLCO (xx)

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001
Tax 3: Unit 1. Chapter 3

I. Requisites for the deductibility of 3. Any NOLCO which remains

NOLCO unused at the end of the
1. The taxpayer must not be exempt three-year prescriptive period
from income tax during the taxable will expire.
year when the NOLCO was incurred.
Rationale: Deductions are of no NOLCO for Individual taxpayers
benefit to the taxpayer in an exempt -refers to an operating loss from
year. Hence, the net operating loss business or exercise of a profession.
from an exempt year should not be For individuals who are mixed
given value by carry-over as this income earners, NOLCO is
would cause undue enrichment to measured by separating
the taxpayer. compensation income from business
or professional income.
2. There has been no substantial
change in the ownership of the NB:
business or enterprise 1.The taxable compensation income
and net income are simply combined
NB: substantial change in business in computing the taxable income of
ownership - a change of at least individual taxpayers.
75% of either the paid up capital or 2. A net operating loss from
nominal value of the outstanding business or exercise of profession is
shares of corporation. not deductible from taxable
Rationale: NOLCO is a privilege compensation income, but is carried
that is not transferable. over as NOLCO.
When there is a substantial change
in the ownership of the business, Special Rule on NOLCO for
NOLCO is no longer allowed Mining Companies
because the owners for whom the Net operating loss sustained by
loss recoupment is intended are no mining companies without the
longer business. benefit of incentives under the
Omnibus Investment Code of 1987
II. Accounting for NOLCO in any of their first 10 years of
Rules in Carry-over of NOLCO operation is allowed to be carried
1. NOLCO is claimable over a period of 5 years following the
following the rule of a first year the net operating loss was
in-first out sustained. Note that this 5-year
2. NOLCO can be claimed only carry-over period will continue to
up to the extent of the remain as is even after the
business net income in the pandemic.
next three years. Prior year
NOLCO cannot be deducted NOLCO and Net Capital Loss
against a subsequent year Carry Over
net operating loss. -NOLCO is deductible against
available net income in three next

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001
Tax 3: Unit 1. Chapter 3

three years of operation.ett capital Z Corporation’s NOLCO should be

loss carry-over is deductible only up retained and transferred to Y
to the extent of the net capital gain in Corporation. Prior to the merger, X
the immediately following year. Corporation already indirectly owned
Z Corporation (Z Corporation’s
Net Capital Loss Carry-Over cannot shares were held “by” Y
be simultaneously with NOLCO Corporations “on behalf of” X
No capital loss carry-over is allowed Corporation. After the merger, X now
when the year’s operation resulted in directly owns Z corporation
a net operating loss. (absorbed corporation) which
continues to exist in Y Corporation.
Merger and Consolidation
Merger- occurs when one business
is merged with another business NOLCO of the acquiree
Consolidation- occurs when several In 2012, the BIR ruled that in a
businesses merge to form a new statutory merger the NOLCO of the
larger business. absorbed corporation is not one of
Acquired business = assignor or the assets that can be transferred
transferor or acquiree and absorbed by the surviving
Purchaser = assignee or transferee corporation, as this privilege or
or acquirer deduction is only available to the
absorbed corporation. Accordingly,
NOLCO of the acquirer the tax-free merger does not cover
NOLCO of the acquirer which it the NOLCO of the absorbed
acquired before the merger or corporation that can be transferred
consolidation continues to be and absorbed by the surviving
deductible even after merger or corporation.
consolidation so long as there is no
substantial change in its ownership. NOLCO is not a transferable right,
privilege or interest
NB: No actual change in ownership
is involved as in the case of merger
of the subsidiary into the parent
company.

Illustration:
X Corporation owns 100% of Y
Corporation. Y Corporation owns
100% of Z Corporation. Z
Corporation has NOLCO. Z
Corporation is merged into Y
Corporation.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001