Loss Carryforward

Categories: Tax, Accounting

You lost money last year. You paid virtually no taxes. That loss has value to you, going forward, as a tax "hedge," or deduction, that you can take against next year's profits. You essentially "carry forward" those losses into next year, and get to keep more of your operating income.

Why is this even a thing? Well, it's probably smart government policy to encourage companies to invest in new businesses and to take modest amounts of financial risk all the time. Those risks, over time, create jobs and make the world a better place, assuming you believe that modern...stuff...makes the world a better place. If you don't, then there's a Golden Pond and a bunch of old Thoreau books we could link you to.

See: Net Operating Loss - NOL.

Related or Semi-related Video

Finance: What is Tax Loss Carry-Forward?328 Views

00:00

finance a la shmoop what is a tax loss carry forward

00:06

all right well feel bad about losing money in your business last year

00:11

well this law will help make you feel a whole lot better you had been going [guy sinking in bath]

00:15

along swimmingly making ten million bucks a year in your hot tub pimp out

00:20

biz where you are the premier provider of turbo Jets neon lights spa caddies [fancy hot tub]

00:26

massaging floor inserts and literal wet bars but then Kanye launched a competing [alcoholic beverages]

00:32

business called hot and wet by Kanye and the next year well you lost six million [Hot and Wet by Kanye building]

00:37

bucks well on your 10 million of taxable profits in a year you had been paying 30

00:43

percent tax or 3 million bucks in taxes to show net income or earnings of 7

00:48

million dollars well you lost 6 million dollars last year so you paid no tax and

00:54

no the government doesn't rebate you 30% in taxes like they don't write you a

01:00

check for 30% of 6 million or 1.8 million years that you lose money

01:06

running your business but they do allow you to carry forward that loss into the

01:12

next year or the next or the next usually up to 7 years total in most

01:17

cases so that tax loss of 6 million bucks then comes in handy the following

01:22

year when Kanye's hot tubs are found to be administering second-degree burns to [Hot and Wet news paper]

01:27

its buyers and you once again make 10 million dollars in taxable profits only

01:32

this time you have 6 million dollars of tax loss carry forward that gets first

01:38

subtracted from the 10 million before you have to even think about taxes so in

01:43

this case you pay taxes on just 4 million dollars or 30% of 4 million or

01:48

just 1.2 million in taxes to net 2.8 million in net income essentially the

01:54

government splits your losses and lets you take the taxable part of losses into

02:00

the future so that the lows are not so low and well as far as Kanye is

02:04

concerned the highs are not so high [Kanye in court]

Find other enlightening terms in Shmoop Finance Genius Bar(f)