When does a C corporation generate net operating losses (NOLs)?

A C corporation generates net operating losses (NOLs) when its allowable tax deductions exceed its taxable income. This situation occurs when the expenses and deductions that the corporation can claim—such as operating expenses, interest expenses, and other deductible items—are greater than the revenue it generates from its operations. As a result, the corporation ends up with a negative taxable income for the year.

Understanding the implications of NOLs is important for tax planning and strategy. If a corporation incurs losses, it can carry these NOLs forward to offset taxable income in future years, potentially reducing tax liabilities as the corporation returns to profitability.

The other options do not accurately describe the conditions under which NOLs are generated. Revenue exceeding tax deductions would result in taxable income, and therefore would not create an NOL. Having a profit without paying taxes is possible due to various credits and deductions, but it doesn't define an NOL situation. Finally, investing in capital assets typically does not create NOLs directly; instead, it may increase depreciation expenses, which can influence taxable income but is not the primary cause of an NOL.