Tax Umbrella

In many instances, companies are allowed to carry forward losses to future years. Doing so creates a so-called "tax umbrella." You know...that thing you carry everywhere in case the weather turns against you (the tax weather, in this case).

Corporations are only taxed on their profits. So if a company posts a loss for the year, it doesn't owe any taxes. What's more, the firm can often carry forward the losses and apply them to future years.

You run Jive Turkey, a restaurant chain that is themed for both Thanksgiving and the 1970s (you can get served stuffing and cranberry sauce by a waiter dressed like David Cassidy). In 2018, it posted a loss of $1 million. In 2019, it had a profit of $3 million. The loss in the previous year becomes a tax umbrella for its 2019 results. It can carry forward that loss, making its taxable income in 2019 only $2 million (the $3 million minus the $1 million loss from the previous year).