Tax Loss Carryforward

Feel bad about losing money in your business this year? Well, tax loss carryforward will help make you feel a whole lot better.

You had been going along swimmingly, making 10 million bucks a year in your hot tub pimp-out biz, where you are the premier provider of turbojets, neon lights, spa caddies, massaging floor inserts and, uh…literal wet bars. But then Kanye launched a competing business, called Hot and Wet By Kanye, and the next year, you lost 6 million bucks. Well, on your $10 mil of taxable profits a year, you had been paying 30% tax, or 3 million bucks…to show net income of $7 million. You lost $6 million 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 percent of $6 million, or $1.8 mil, just to make you feel better in years you lose money. But they do allow you to carry forward that loss into the next year, or the next, or the next. Up to 7 years total, in most cases.

So that tax loss of $6 million then comes in handy the following year, when Kanye’s hot tubs are found to be administering second-degree burns to its buyers, and you once again make $10 million in taxable profits. Only this time, you have 6 million bucks of tax loss carryforward 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 percent of $4 million, or $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 as far as Kanye is concerned, the highs are not so high.