Loss Carryback

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.