Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Loss Carryback

What it is:

The term "loss carryback" is where a company retroactively chooses to apply the net operating loss in the current year to the previous profitable year(s) to obtain a tax refund for monies already remitted or incurred on the profits earned in those years.

How it works (Example):

For example, if a company has a net operating loss in the current year of $2,000,000, it can carry that backward to the previous year to offset its net operating income of $2,000,000. The company would then have a zero tax liability ($2,000,000 less $2,000,000). At this point, the company could apply for a refund for the tax it paid on the original $2,000,000 if they have already remitted it.
 
For an individual or a company, the carryback period is 3 years.

Why it Matters:

A company which happens to find itself in a loss position for a particular year has at its disposal a tool that it can utilize to offset past profitable financial results. This is a situation where corporate or individual tax planning can be used retroactively.

By the same token, the company or individual can use this principle in their future tax planning when they anticipate they will have a loss in future years.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...