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The Tax Foundation is the nation’s
leading independent tax policy
research organization. Since 1937,
our research, analysis, and experts
have informed smarter tax policy
at the federal, state, and global
levels. We are a 501(c)(3) nonprofit
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Net Operating Loss Provisions:
State Treatment and the Economic
• Well-designed Net Operating Loss (NOL) provisions benefit the economy by
smoothing business income, which mitigates entrepreneurial risk and helps
firms survive economic downturns.
• Forgoing tax revenue in the short term affords businesses the opportunity to
prioritize human and physical capital investment.
• Start-ups and industries with profits highly correlated to the business cycle
are often harmed by weak NOL provisions.
• NOL provisions promote tax neutrality by reducing additional tax burdens
on businesses with highly cyclical income streams or higher exposure to
• The federal government allows NOL provisions to be carried forward
indefinitely, and to reduce tax liability by up to 80 percent in any given year.
Many states either conform to this provision or provide uncapped 20-year
carryforwards, but some are far stingier than the federal government. These
states should improve their treatment of NOLs to match or exceed federal
Timothy Vermeer Senior Policy Analyst
TAX FOUNDATION | 2
From the family automobile to the department store, much of the productivity and accessibility
known to today’s producers and consumers materialized because entrepreneurs like Henry Ford and
James Cash Penney took risks. Although more than a century may have passed since Henry Ford
premiered his Model T, our lives and our society are still transformed by private sector innova