Tax Loss Measurement

Abstract

We use financial disclosures to develop a novel proxy for net operating loss carryforward (NOL) tax benefits. This approach more accurately identifies firms with tax losses, more precisely measures the tax loss, and better predicts reductions in future taxes than existing proxies. We derive a prediction model, which future researchers can employ to better approximate the NOL tax benefits based on readily available financial data. We also demonstrate how NOL nonlinearity affects measurement of corporate tax status. By proposing a new measure and demonstrating trade-offs across competing proxies, we contribute to the work in public economics, corporate finance, and tax accounting that examines the responsiveness of the business sector to corporate tax incentives.