Availment of NOLCO Deduction

The Net Operating Loss Carry-Over (NOLCO) deduction is a vital provision under the Philippine National Internal Revenue Code (Tax Code) that allows businesses to offset their losses against future taxable income. This measure, especially significant during the economic downturn caused by the COVID-19 pandemic, helps companies manage their tax liabilities over time, thereby aiding their financial recovery.

Key Provisions of NOLCO Deduction:

1. General Rule under the Tax Code:
   • Section 34(D)(3) of the Tax Code allows the net operating loss of a business or enterprise for any taxable year to be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss.
   • A net operating loss is defined as the excess of allowable deductions over gross income for a taxable year.
   • The deduction is disallowed for losses incurred during a year when the taxpayer was exempt from income tax.
2. Bayanihan to Recover as One Act (RA 11494):
   • This act extends the NOLCO period to the next five consecutive taxable years for losses incurred in taxable years 2020 and 2021.
   • Applicable to corporations with fiscal years ending on or before June 30, 2021, and June 30, 2022, respectively, as clarified by Revenue Regulations 25-20 and Revenue Memorandum Circular 138-20.
3. Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (RA 11534):
   • Allows the net operating loss of registered projects or activities during the first three years from the start of commercial operations to be carried over for the next five consecutive taxable years.
4. Financial Institutions Strategic Transfer (FIST) Act (RA 11523):
   • Permits financial institutions to treat losses incurred from transferring non-performing loans and other properties within two years from the Act's effectivity as ordinary losses, which can be carried over for five consecutive taxable years.
   • Excludes accrued interest and penalties from the loss carry-over.
5. Renewable Energy (RE) Act of 2008 (RA 9513):
   • Allows net operating losses of renewable energy developers during the first three years of commercial operation to be carried over for the next seven consecutive taxable years.
6. Philippine Mining Act of 1995 (RA 7942):
   • Permits mining companies to carry over net operating losses incurred in the first ten years of operations for the next five consecutive taxable years.

Conditions for Availment:

• Ownership Continuity:
  • The NOLCO deduction is allowed only if there has been no substantial change in the ownership of the business. This means that at least 75% of the nominal value of the corporation’s outstanding issued shares or paid-up capital must be held by the same persons throughout the loss and carry-over periods.

These provisions collectively provide a comprehensive framework for businesses in various sectors to manage their financial losses effectively, encouraging economic stability and growth amidst challenging circumstances.