How can a firm utilize its net operating losses (NOLs)?

A firm can utilize its net operating losses (NOLs) primarily by carrying them back to offset past taxable income or carrying them forward to reduce future taxable income. This mechanism provides a significant tax benefit, as it allows a company that has incurred losses in one year to recover taxes paid in previous profitable years or to lower its tax liability in succeeding profitable years.

When a company carries back its NOLs, it effectively applies the losses to previous periods where it had taxable income, thereby receiving refunds on taxes already paid. This can improve the company's cash flow in the short term. On the other hand, carrying forward allows the firm to decrease future taxable income, which can be particularly valuable when the firm anticipates higher income in upcoming years.

Understanding this functionality is critical in tax planning and financial strategy within the framework of corporate finance, as it can greatly influence a firm's capital structure and investment decisions. The other options, such as raising capital through stock issuance or reducing expenses, do not directly relate to the strategic employment of NOLs for tax purposes.