What is a Tax Loss Carryforward?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen
Tax loss carryforward allows companies to report losses when they have particularly large gains to offset taxes.
Tax loss carryforward allows companies to report losses when they have particularly large gains to offset taxes.

A tax loss carryforward is a technique used in accounting, which can allow you to report losses up to seven years after they occur (in most cases) to minimize paying taxes in a year when a company or an individual has had a high profit. Sometimes this occurs naturally as a result of limits on the amount of loss that can be deducted in a certain year. People or businesses then carry forward the amount above that limit to the next year to reduce overall tax payments. At other times, when tax amounts are low, part or all of losses may be deducted in a year when someone or some business makes more profit.

Using a tax loss carryforward can make stock prices drop for a company and inhibit investors.
Using a tax loss carryforward can make stock prices drop for a company and inhibit investors.

Use of the tax loss carryforward is legal, though critics of a tax system sometimes scrutinize its use. “Saving” a huge loss year to mitigate taxation on huge profits in a subsequent year may significantly lower payments in the year that the technique is used. There are some drawbacks to saving loss amounts, though. A person wanting to employ this method is banking on having a profitable year where not claiming all current tax loss at present is worth it. If that profitable year never occurs, you may still pay more taxes in a year when your profits weren’t high than you would if you didn’t use a tax loss carryforward to mitigate those taxes when they first occurred.

Sometimes you have no choice on when to use the tax loss carryforward. If you are an independent contractor and file Schedule C along with your Internal Revenue Service (IRS) 1040, your losses in a year may be higher than your gains. According to US tax law, any amount of loss above an amount that zeroes out your profits completely is carried forward to the next year, provided you remember to claim it. Especially in the fledgling years of your work as an independent contractor, carryforwards may provide a means to reduce overall taxes paid. Setting up a business as an independent contractor, with all its inherent costs like purchasing equipment, may be more expensive than the money you will make from that business in the first few years you operate.

There can be some negative consequences of using a tax loss carryforward, especially for large businesses. If you “save” some of your losses to report in another year, your profit and loss statement could end up looking unattractive to investors or purchasers of company stock. Unless investors realize you have used a carryforward, they may assess your business as being not worthy of investment because it is not posting good profits. For those businesses that sell stock, carryforwards may discourage people from purchasing stock in your business or reduce overall stock price.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Discussion Comments

anon309180

If my last year's company loss as per company act 2,500,000 and this year's is 3,000,000 for the current year, what is the profit for computation of income tax act and what is the mat (minimum alternative tax) is payable?

anon169527

Is a tax loss carryforward of $1,000,000 for company X usually worth $1,000,000 in present value to a firm that might acquire company X?

anon68068

I had a loss in 2008 in Sch E which brought my AGI to 0. How do I take advantage of the loss carry-fwd provision and where on 1040 does it show?

anon44241

what is meant by depletion of tax-loss carry forwards?

anon36027

can an individual use a tax loss carryforward from a business that is insolvent (a subchapter s structure)?

quiktdr

Is there a way of an individual either transferring or selling their loss carryover?

anon30000

Can you use a carryforward loss as an individual?

anon20846

If company is wholly owned by a parent company in a different country and they decide to close the smaller company which has worked at a loss for a couple of years. Does the parent company get to carry forward those losses of the subsidiary after the business is closed?

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    • Tax loss carryforward allows companies to report losses when they have particularly large gains to offset taxes.
      By: pkstock
      Tax loss carryforward allows companies to report losses when they have particularly large gains to offset taxes.
    • Using a tax loss carryforward can make stock prices drop for a company and inhibit investors.
      By: s_l
      Using a tax loss carryforward can make stock prices drop for a company and inhibit investors.