Loss Carryforward
What it is:
The term "loss carryforward" refers to an accounting practice whereby companies utilize their current year's net operating loss against future year's net operating profit to reduce the taxes owed in those future profitable years. Also called tax loss carryforward, this can be utilized by individuals, corporations, or funds.
How it works/Example:
For example, if a company has a net operating loss in the current year of $1,000,000, they can carry that forward so that if their net operating income for the following year is $2,000,000, the company would have a tax liability on only $1,000,000 ($2,000,000 less the $1,000,000).|
For an individual or a company, the carryforward period is 20 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 use to offset taxes due on profits in the future.
Realizing this, the company or individual can use this principle in future tax planning, especially if they anticipate a large gain in any of the following six years.