What defines a net operating loss (NOL)?

A net operating loss (NOL) is defined as the situation where a taxpayer’s allowable deductions exceed their gross income for a particular tax year. This means that the business or entity is operating at a loss. Understanding NOL is crucial, as it can affect tax liability in future years. When an entity experiences an NOL, it may carry the loss forward or backward to offset taxable income in other years, effectively reducing tax liability.

In this context, the other choices do not accurately describe a net operating loss. If income exceeds expenses for the year, it results in a profit rather than a loss. Profit from all business activities focuses on overall gain instead of the shortfall indicated by a net operating loss. A surplus in income from multiple investments suggests earning profit, which does not align with the concept of NOL. Therefore, the option indicating that deductions surpass income is the correct characterization of a net operating loss.