Net Operating Losses: Carryforwards and Their Value

Introduction

Uber lost money for most of its history, and the tax losses did not disappear. At the end of 2024 it still had $8.2 billion of US federal net operating losses that never expire, plus smaller amounts that do, more than $9 billion of state losses and about $20 billion of foreign ones. That year, after demonstrating sustained profits in the US, it concluded it would be able to use most of its US deferred tax assets and released a $6.4 billion valuation allowance. On pre-tax income of $4.1 billion, Uber reported a tax benefit of $5.8 billion and net income of $9.9 billion.

A net operating loss, or NOL, is the tax law's way of smoothing income over time: a company that loses money in one year can use the loss to reduce taxable income in later years. For a company emerging from losses, or for a buyer considering one, the losses can be worth a great deal. But their value depends on when they can be used, how much can be used each year, and whether a change in ownership limits them.

An NOL arises when a company's deductions exceed its gross income for tax purposes in a year. The loss is measured on the tax return, not in the books, so a company can report a book profit and a tax loss, or the reverse, as explained in book vs tax accounting.

Net operating loss carryforward

A tax loss from a prior year that can be deducted against taxable income in future years, subject to the rules of each jurisdiction. Under US federal law, losses arising in tax years beginning after 2017 can be carried forward indefinitely but can offset only 80% of taxable income in any year.

The federal rules depend on when the loss arose. The 2017 Tax Cuts and Jobs Act changed them for losses from 2018 onward; the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily relaxed them for 2018 to 2020 losses, allowing five-year carrybacks and suspending the 80% cap, as BDO's CARES Act FAQ explains:

State rules vary widely, with their own carryforward periods and caps, and some states suspend NOL use in difficult budget years. Foreign rules vary too: many countries allow indefinite carryforwards but limit annual use. A company's losses therefore have to be tracked by jurisdiction, and a large headline number can hide losses in places where the company may never earn enough to use them.

Credits and Other Carryforwards

NOLs are not the only tax attributes that carry forward. Unused federal research credits can be carried back one year and forward twenty, and they expire if unused: Uber reported $1.2 billion of them beginning to expire in 2028. Interest disallowed under the business interest limit carries forward indefinitely and becomes deductible when the company has enough capacity, as explained in interest deductibility limits under Section 163(j). Corporate capital losses are narrower still: they can offset only capital gains, carried back three years and forward five. Each attribute is a separate deferred tax asset in the tax note, with its own expiry profile and its own chance of being used.

In the financial statements, under Accounting Standards Codification (ASC) 740, an NOL carryforward is a deferred tax asset, measured as the loss multiplied by the enacted tax rate where it will be used. A $1,000 federal NOL becomes a $210 deferred tax asset at the 21% rate. As with every deferred tax asset, the company must then decide whether it is more likely than not to use it, and record a valuation allowance against any portion it is not, the test covered in deferred tax assets and valuation allowances.

Uber's 2024 annual report shows both steps. Its deferred tax asset for NOL carryforwards fell from $6.2 billion to $4.3 billion during 2024, and its federal losses from about $12.5 billion to $8.4 billion, as it began using them against US profits. Its valuation allowance fell from $13.9 billion to $6.3 billion, mainly because of the US release. The allowance that remained covered mainly its Netherlands deferred tax assets and California research credits, and Uber noted it might release a significant portion of the Netherlands allowance within twelve months.

An NOL is worth the present value of the tax it will save, which depends on three things: the amount of future taxable income, the annual limits on using the loss, and the discount rate. Suppose a company has a $1,000 federal NOL and expects $300 of taxable income a year before using it. The 80% cap allows it to deduct $240 a year:

The NOL saves $210 of tax in total, its deferred tax asset value, but its present value is about $165, because the savings arrive over five years. With lower expected income, or a higher discount rate reflecting uncertainty about that income, the value falls further. Bankers often discount NOL savings at the cost of equity or higher, since they depend on the company actually becoming profitable, and the tax rate applied should match the assumptions in the rest of the forecast, covered in effective, statutory and cash tax rates.

Limits After an Ownership Change

Losses are most valuable to a buyer with taxable income to shelter, which is why the tax law limits their transfer. Under Section 382, if a company's ownership changes by more than 50 percentage points among its 5% shareholders over a three-year period, the NOLs that existed before the change can be used each year only up to a limit: the company's equity value at the change multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service (IRS) in its tables of applicable federal rates. At a rate of 4%, a company with $500 of equity value at the change could use only about $20 of its old losses a year, however much it earns.

The limit can make a large NOL nearly worthless after an acquisition of a small company, or after a bankruptcy in which creditors take the equity. The rules, and the planning around them, are covered in Section 382 NOL limitations.

In mergers and acquisitions, NOLs are valued as part of the target's tax attributes, with the Section 382 limit applied to the deal value. In leveraged buyouts, a target's NOLs can shelter cash flow in the early years, when debt service is heaviest, if the limit leaves enough room. In restructurings, losses can also shrink: debt cancelled in bankruptcy is generally excluded from taxable income, but the company must reduce its tax attributes, including NOLs, by the amount excluded.

Tax losses are one of the few assets that grow more valuable as a company's prospects improve, and lose value as they fade. A banker valuing them is really forecasting the company's taxable income, and the limits that apply to it, which is why the same NOL can be worth a great deal to one buyer and almost nothing to another.