A net operating loss, or NOL, occurs when a company's deductible expenses exceed its taxable income in a given year. That loss can generally be carried forward to offset taxable income, and reduce tax owed, in future profitable years.
Most startups run NOLs for years before turning profitable, since early spending on product, hiring, and R&D routinely exceeds revenue. Those accumulated losses don't disappear. They sit on the books as a real future tax asset, reducing the tax bill once the company actually starts generating taxable income.
There's a real catch worth knowing early: a significant change in ownership, the kind that happens in a large funding round or an acquisition, can limit how much of an NOL can actually be used going forward under IRC Section 382. A large accumulated NOL isn't automatically worth as much after a big raise as it looked like on paper before it.
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