Lesson 49 - Advanced Accounting Course

Lesson 49: Tax Loss Carryforwards and Carrybacks

💡 What Is a Tax Loss?

A tax loss happens when a company’s deductible expenses are greater than its taxable income during a certain year. Instead of wasting that loss, tax rules often allow the company to use it to reduce taxes in other years.

✅ This can lead to tax refunds (carrybacks) or future tax savings (carryforwards).

🔁 What Are Carryforwards and Carrybacks?

📦 Example

Let’s say:

• In 2024, a company has a $200,000 taxable loss
  
  

• In 2022, it had a $100,000 taxable profit
  
  

• In 2025, it expects to make $300,000 in profit
  
  

Carryback (to 2022):

• Apply $100,000 of the 2024 loss to 2022
  
  

• Get a refund of taxes paid on 2022 profit
  
  

Carryforward (to 2025):

• Remaining $100,000 of loss is carried to 2025
  
  

• Reduces 2025 taxable income from $300,000 to $200,000

🧾 Rules Vary by Jurisdiction

📌 Always check local tax law — the rules for how much and how long you can carry losses are not the same everywhere.

📊 Advantages of Using Loss Carryforwards

✅ Reduces future taxable income
✅ Smooths out business volatility
✅ Encourages long-term investment
✅ Protects companies in bad years

⚠️ Limitations and Considerations

🧠 Real-World Example: Startups and Tech Firms

• Many startups lose money in their early years.
  
  

• They accumulate NOLs (Net Operating Losses).
  
  

• When they become profitable, they use those losses to reduce future taxes.
  
  

✅ Example: A tech firm with $5M in NOLs becomes profitable in year 5 and applies those losses to avoid taxes for several years.

📘 In Accounting Terms

🧾 Example: "The company has $2.5M of tax loss carryforwards that expire between 2030 and 2035."

✅ Summary