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Net Operating Loss (NOL) - Meaning, Examples, Accounting Treatments - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo watch the video
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clicking the bell ican friends today we
are going to learn that is a concept on
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net operating loss so since our
childhood we have been taught that you
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know the objective of the financial
management is basically to create value
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for the shareholders so the definition
of this value is different for different
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people so for some the financial analyst
the benchmark is to increase nothing
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more than but EPS for them it's it's
that's the case while others crave for
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benchmark for increasing the market
price per share which we call as MPs so
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that debate on pros and cons of one
approach or the other goes on like a
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vicious circle so one thing on which
both school of thoughts agree is that
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the driver of EPs and MPs is one single
thing that's called as net profit it's a
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driver for both of them okay
now the most scared thing in the
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corporate world there is tremendous
pressure on the management to increase
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the net profit most of the enterprise
goals and even the performance goals of
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senior management are linked and aligned
to it hence you know the losses are
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always thrown up upon reporting of loss
even in a single order can lead to
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unfamiliar sacking of senior executives
but like in real world exceptions are
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there in the corporate world to and that
operating loss is one such exception
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let's get into the nitty-gritty of the
same and here we we will discuss net
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operating loss however you know if you
want you can also go and learn M&A for
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which the M&A training is available now
what is net operating loss or noL it
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as as simple as that see according to
the US federal tax laws a net operating
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loss is a loss that is arising
you know period when the tax deductible
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expenses okay that is the expense
tax deductible expense exceeds the that
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revenue if this thing happens then there
is a operating NOL so this loss
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can be carried forward in the future and
you know they set off in the future of
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profits allowing the carpet player tool
to pay lesser tax than required to put
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simply net operating loss is basically a
blessing in disguise you can say now
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this net operating loss as you can see
over here this is of Go Daddy okay
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they made losses over here this is the
net operating loss of Go Daddy
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so basically based on this let me
explain you know how things are going to
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work and we'll be discussing an
illustration so that you know you get to
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know much more in a good fashion now
let's discuss one example now in this
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example it says you know there's a
company called pine Apple Inc it has a
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taxable revenue of $5,00,000 of an
expenditure which is close enough to
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6,00,000 and in 2016 on account of the
change in the economic factor it made a
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taxable revenue of $1,00,000
expenditures close in with $9,00,000
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tax rate 50% let's see the
computations of the tax expenses for
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2015 see you can see the taxable revenue
that was 5,00,000 and it except expenses
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6,00,000 which was available in our details
right now what we can do we just deduct
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the revenue from the expenses that gives
us the net operating loss that is 1,00,000
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and negative so the tax expenses
basically will be 0 now over here it has
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written since the tax is always paid on
the profit and loss
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hence the tax wait in 2015 is going to
be nil so let's see the computation of
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the tax expenses for the year 2016 based
on the heaters that is available to us
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now when we go down we see the taxable
revenue was close enough to 1 million
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right and the taxable expenses was 9,00,000 which gives us the net operating
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profit as 1,00,000 the tax expenses will
be 50,000
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it is as simple as that so it is quite
visible from here that you know the
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tax paid in both the years by pine
Apple Inc you know is close enough to
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50,000 right over here zero in
the previous previous one and
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50,000 in the 2016
so over here we need to load something
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that you know in in this above example
we have made a important assumption that
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you know they carry forward of the
losses are not allowed well this is not
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how things actually work in real world
carry forward of the losses are always
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allowed by the federal and state
governments subjective fulfillment of
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certain conditions and tax provisions
let's now deal with example number two
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that will be with net operating losses
let's have a look now over here will be
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we'll be looking at the impact on the
carried forward on the tax expenses or
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the tax paid basically 5,00,000 and 6,00,000 no change loss right and the tax
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expenses 50% 50,000 that is 50% on 1,00,000 which is
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negative 50,000 so that you
don't need to pay so that will be tax
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loss of 50,000 in 2015 over here
we can carry forward this amount in the
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next year that is a 2016 is its team
and it can be used and it can be set off
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against the future profits that is
available to you now let's see their tax
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competitions for the year of 2016 and
see what exactly is there in case of
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2016 the taxable revenue was how
much 1 million taxable expenses now
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9,00,000 and operating profit 1,00,000 now the tax expense was 50,000 but the loss that
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is the tax you can see they carry
forward the tax loss from the 2015 that
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is available to us 50,000 so in a
way your tax paid will be nil right so
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tax paid in both years is lil so thus we
can see that you know how net operating
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loss of $1,00,000 has turned out
to be blessing in disguise in 2016
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since this carried forward of losses
okay carry forward of the tax loss of
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5,50,000 on account of the net
operating loss in 2015 has lowered the
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net operating profit in 2016 so thereby
they are reducing the tax paid now let's
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see some carry bags and carry forward
concepts now the example that we learn
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that depicts you know the carry forward
of the net operating losses see the
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regulatory provisions also allows this
carry backs of the net operating losses
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now what happens the net operating
profits is can be carried forward for
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2 years you can say and and can be
carried forward for 20 years for set of
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against EE income in the past or future
period respectively so you can say 2 to
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20 years now beyond an after 2 to 20
years any remaining net operating profit
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pending set offs
expire okay there is an option available
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to the company for waiving of the
carry-back period and directly use the
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carry forwards but this is hardly availed
by any company since the principle of
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the present value dictates that the
value of the savings in the early period
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is greater than the value of the savings
in the later period
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see corporations basically have a high
huge I mean huge fluctuation in the
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taxable income and expenses which
results in taxpayers having substantial
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profits and you can say 1 year and
losses in other Europe so in order to
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overcome this thing this temporary
fluctuation and provide relief to the
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corporate against the unfavorable
business cycle they carried forward you
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can say of the and carry back provisions
have been provided basically by the
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government now guys see there are some
rules basically you know I'll read some
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things in in a short way see rules for
set-off of net operating losses in order
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to maximize the savings see first no
first set of the NOL that is a net
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operating loss by carrying it back to
preceding 2 years so you can say two
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years preceding back and if any losses
are still available for set off then you
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know the second thing that you can do is
set off the NOL in the next year and
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carry forward it for the next 20 years
now the third is any remaining NOL
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expires after 20 years so after 20 years
it will expire hands it will have no
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value not the sequence you know while
availing the tax credit basically the
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sequence you know it ensures the maximum
savings to the company on account of the
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net operating losses let's see a example
that is on tax carry back example and
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let me show you some details now over
here in this particular example as you
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can see see the Iron & steel company
reports are basically a pre-tax
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operating loss of $90,000 in
2007 for both the financial reporting
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and income tax purposes see financial
income and taxable income for the
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previous 2 years you know over here
you can see the details 2005
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and 2006 you can see the
data how this have been calculated with
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your taxable income 40000 x 25%
that is your
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10000 is the amount of the taxable
income
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in this case 15,000 so the total tax
refund is 25,000 so you know forward
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company reports a pre-tax operating loss
of 60,000 you know in 2007 for both
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the financial reporting and income tax
purposes now let's understand some of
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the accounting treatment of the net
operating losses see net operating
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losses are basically the assets of the
company since it reduces the future tax
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liability see under further asset
classification it is classified under
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deferred tax assets very important this
is the deferred tax assets basically is
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created for the very reason on account
of the temporary differences see that
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reduces the taxable income and a
deferred tax assets is created on the
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assumption that they come even earn
sufficient profit in the future from
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which the past net operating losses can
be set off company will pass the journal
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entries like deferred tax assets that
will be that will be debited - it will
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be income statement that is you can say
profit and loss account or income
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statement so this will be basically
credited this will be the journal entry
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see for tax assets on account of the net
operating losses are presented and
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disclosed under the non current assets
in the balance sheet ok now let's see
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how the sources of the net operating
losses see one of the most important
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thing to note that you know the net
operating loss is the excess of the
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taxable expenses over here that we learn
it expenses or the deduction over the
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taxable income so the taxable income or
expenses are different from the normal
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business income expenses see accounting
net profit or net profit mention in the
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income statement is derived after
deducting all the business expenses like
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depreciation inflow expenses and so on
and so forth
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from the revenue earned by the company
whereas as for the tax law a certain
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business expenses are not allowed to be
deducted from the revenue hence the net
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profit or loss as per the tax laws will
always be different from the normal
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profit as disclosed in the financial
statement like for example the net
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profit and loss earned by Pepsi
I'm talking about PepsiCo very
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well-known company its financial
statement
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PepsiCo had shown in in in 2015 the net
profit earned by them was close enough
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to 4.45 sorry $5452 and
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million dollars and the figure which is
disclosed in the PepsiCo's
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financial statement is the accounting
net profit which should be significantly
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different from the tax profit now I'll
show you some of the tax deductions you
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know or basically I'll make you
understand that you know the tax
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deductions or allowance generally
increases the net operating losses see
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first the normal business or trade
expenses second the deductions on
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account of the business related expenses
as an employee deduction for yep normal
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business losses and fourth is like
deduction for the losses arising in the
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associate business companies now let's
learn what is net operating net
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operating losses in mergers and
acquisition the net operating loss
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reduction allows the company to carry
back and forward the loss in a low
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setting of the taxable profit against it
sit minimizes the disparity that would
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otherwise result between business and
this table profit and business without
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fluctuating profit this calls for the
very careful consideration for these
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strategic decision makers while choking
or plan for M&A you can say while
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choking out the plan for M&A that is
very important now what is it is in a
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great deal of companies many corporate
looks out for the companies that have a
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huge accumulated net operating losses
rather than operating profit operating
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loss basically helps to reduce the
group's tax expenses and thereby the
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resulting in the increase in the oral
profit see in corporate world we can see
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many examples of Austral taken account
of the net operating losses company look
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out for such target companies with a
huge accumulated losses in order to
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safeguard its interest of those
companies like basically IRS had
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modified the IRS code so finally let's
make the conclusion out of whatever we
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have learned
see there is there is also one important
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point to note that you know each country
has their own rules and regulation which
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governs ESET often carry forward of the
operating losses see basically this law
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rules and regulations are complex and
require careful consideration of each
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provisions like for example in United
States each state has its own rules and
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regulation governing the tax code 30
states DC confirms in the federal tax
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code allowing 20 years of nol carry
forward while aliveness allows 12 years
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Kansas and Vermont allows 10 years see
net operating loss and reductions are
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very important safeguard provided
basically - or you can say corporate
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especially those businesses which
operates in industry that fluctuates
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with the business cycle and such
cyclically business might experience
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significant profit during boom and
significant loss during the recession
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the recession cycle so annoyance are
important assets for the company it
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works on the pay-as-you-earn principle
and when the company earns profit it
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pays taxes and when it incurs loss it
gets some relief hence they are valuable
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asset in fact some of the company
purchase are they're coming solely for
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the net operating losses it's a famous
person for poet say that you know
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don't grieve anything you lose comes
around in another form the same could be
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said with respect to the net operating
losses so that's it for this particular
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topic if you have learned and enjoyed
watching this video please like and
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comment on this video and subscribe to
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you everyone
Cheers
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