A net operating loss occurs when the amount of operating expenses incurred by an entity exceeds its operating revenues. These revenues and expenses are related to the operating activities of the business; no financing activities, such as interest income or interest expense, are included.
The concept is somewhat different from a taxation perspective, where it occurs when the amount of tax deductions exceeds the reportable amount of taxable income. When a taxpayer reports a net operating loss, it can be used to recover tax payments made in prior periods, with certain restrictions, which is called a carryback. If there is still a net operating loss after these recoveries have been made, the residual balance can be used to offset future tax payments, which is called a carryforward.