Corporate Taxes

Many Benefits and Few Costs to Reporting Net Operating Loss Carryover Gao ID: GGD-93-131 September 23, 1993

This report provides information on corporate net operating losses, which take place when allowable deductions exceed gross income for a tax year. Within limits, tax law allows taxpayers to carryover such losses to offset profit reported in other tax years. Specifically, the carryover amount can be used as a net operating loss deduction to reduce or fully offset tax liability. GAO (1) estimates the amount of corporate net operating loss carryovers from past years, (2) evaluates Internal Revenue Service (IRS) taxpayer instructions on how to use such loss carryovers, (3) analyzes an IRS proposal to modify corporate tax returns to include the reporting of loss carryover amounts, and (4) analyzes IRS' enforcement efforts on corporate net operating losses and net operating loss deductions reported by corporations. GAO also provides statistics on such subjects as net operating loss carryover by industry and the highest deduction items contributing to these losses.

GAO found that: (1) small and large corporations reported at least $245.7 billion in NOL carryovers by 1989 and most of the corporations erroneously reported NOL carryover as NOLD; (2) the wholesale and retail trade, construction, and manufacturing industries have the lowest percentage of NOL carryover and the mining, finance, insurance, real estate, agriculture, forestry, and fishing industries have the highest NOL carryover; (3) foreign and domestic corporations have similar percentages of NOL carryover to total receipts; (4) corporations erroneously report NOL carryover as NOLD because reporting instructions are not clear; (5) IRS plans to clarify 1993 NOLD instructions; (6) IRS has proposed that corporations report their NOL carryover on a separate line on their tax returns; (7) new NOL data would improve revenue estimates on proposed changes to corporate tax law, voluntary compliance among corporations, and IRS checks for NOLD compliance; (8) IRS generally audits a small percentage of corporate returns that report NOL because it believes they have little revenue potential; and (9) IRS audits of small companies reporting NOL in 1987 could have generated $2 billion in additional tax revenue.

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