The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) No. 25-2020 on September 30, 2020 prescribing the Rules and Regulations to implement Sec. 4 (bbbb) of Republic Act (RA) No. 11494 (Bayanihan to Recover as One Act) relative to Net Operating Loss Carry-Over (NOLCO) under Section 34 (D)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended.
Unless otherwise disqualified from claiming the deduction, the business or enterprise which incurred net operating loss for taxable years 2020 and 2021 shall be allowed to carry over the same as a deduction from its gross income for the next five (5) consecutive taxable years immediately following the year of such loss.
The net operating loss for said taxable years may be carried over as a deduction even after the expiration of RA No. 11494 provided the same are claimed within the next five (5) consecutive taxable years immediately following the year of such loss.
Here’s what it means in plain English
When you incur a net operating loss in years 2020 and 2021, you may use that (carry over) as an additional expense for the next 5 years. Initially, this net operating loss carry over (NOLCO) is only for a period of 3 years, which was amended by RA 11494.
But first, let’s clarify a few things first:
The numbers here apply to your income statement and applicable to income taxes. VAT or percentage taxes aren’t applicable.
In income statements, there are a couple of important line items there:
- Sales or revenues
- Cost of goods sold or cost of sales
- Revenues minus cost of goods sold equals gross income
- Operating expenses which includes your rent, utilities, and other expenses
- Gross income minus operating expenses equals Net Taxable Income or Net Operating Loss.
Sample scenarios and computations
Let’s say Mang Juan Restaurant has a net income of PhP 50,000. So, no NOLCO applicable.
For 2021, here’s how their income statement looks like:
- Sales = 1,000,000
- Cost of Services = 700,000
- Gross Income = 300,000 (sales – cost of services)
- Expenses = 500,000
- Net loss = 200,000
Then in 2022, Mang Juan Restaurant had a good year and earned a net income of 300,000.
Based on RR 25-2020, they may carry over the NOLCO of 200K from 2022 2026 as further deduction from the subsequent net income. Here’s what that may look like in their 2022 income statement:
- Net income = 300,000
- NOLCO = 200,000
- Net taxable income = 100,000 (300k – 200k)
If Mang Juan Restaurant is not able to use the NOLCO up to 2026, then it expires and it can no longer use it in 2027 onwards. This only happens if they incur net loss until 2026.
Here’s another example:
If Company A in 2022 has only 150k net income instead of 300k, then the NEW net income is 150k net income less 150k net loss from 2021 = zero.
The unused balance of 50k (200k less 150k used in 2021) may be further used as deduction in 2022 to 2026.
In 2022, you can not use the whole 200k since you only have 150k from where you can deduct the NOLCO. After 2026, the remaining 50Kk if still unused shall expire.
Other relevant reading
- RA 11494 — An Act Providing for COVID-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and for Other Purposes
Where can I learn more?
You can learn more about the RR 25-2020 from the BIR website. Here are some important links: