Loss Carryback
Categories: Tax, Accounting
See: Net Operating Loss.
You own a business making doorknob cozies. Last year, you made $500,000. You mostly sold at arts and crafts shows and your expenses were pretty low, allowing you to bank a profit.
This year, however, you posted a loss of $200,000. You tried to expand the business and paid for those Google Adwords for "doorknob" and "cozy." Expenses got higher than you expected.
Now it's tax time. A loss carryback lets you apply the operating loss you posted this year to offset a profit in one of your previous years. It represents the opposite of a carry forward, which would let you use a loss this year to offset a profit next year.
Since corporate taxes are paid only on the profits generated, being able to offset a profit with a loss lowers the tax burden. So, in this case, you would apply that $200,000 loss to last year's $500,000 profit. That leaves you with a remaining tax liability on just $300,000 from last year.
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finance a la shmoop what is a tax loss carry forward
all right well feel bad about losing money in your business last year
well this law will help make you feel a whole lot better you had been going [guy sinking in bath]
along swimmingly making ten million bucks a year in your hot tub pimp out
biz where you are the premier provider of turbo Jets neon lights spa caddies [fancy hot tub]
massaging floor inserts and literal wet bars but then Kanye launched a competing [alcoholic beverages]
business called hot and wet by Kanye and the next year well you lost six million [Hot and Wet by Kanye building]
bucks well on your 10 million of taxable profits in a year you had been paying 30
percent tax or 3 million bucks in taxes to show net income or earnings of 7
million dollars well you lost 6 million dollars last year so you paid no tax and
no the government doesn't rebate you 30% in taxes like they don't write you a
check for 30% of 6 million or 1.8 million years that you lose money
running your business but they do allow you to carry forward that loss into the
next year or the next or the next usually up to 7 years total in most
cases so that tax loss of 6 million bucks then comes in handy the following
year when Kanye's hot tubs are found to be administering second-degree burns to [Hot and Wet news paper]
its buyers and you once again make 10 million dollars in taxable profits only
this time you have 6 million dollars of tax loss carry forward that gets first
subtracted from the 10 million before you have to even think about taxes so in
this case you pay taxes on just 4 million dollars or 30% of 4 million or
just 1.2 million in taxes to net 2.8 million in net income essentially the
government splits your losses and lets you take the taxable part of losses into
the future so that the lows are not so low and well as far as Kanye is
concerned the highs are not so high [Kanye in court]